Wall St Week Ahead: US bank stocks falter as recession worries take hold

16 December (Reuters) US bank stock prices are falling in December as concerns about an impending recession and declining profit margins reduce investor interest in the sector.

When compared to the wider index (.SPX), which down 5.5% over the same time period, the S&P 500 banking index (.SPXBK) has fallen around 11% this month. Shares of Bank of America (BAC.N), which have dropped 16% this month, were among the worst impacted. Wells Fargo & Co. (WFC.N) and JPMorgan Chase & Co. (JPM.N) shares have both fallen by approximately 14% and over 6%, respectively.

Asset prices have recently begun to reflect investors’ growing concern that the Federal Reserve’s most extreme tightening of monetary policy in 40 years, intended to reduce inflation, could also stifle growth.

Treasury rates, which follow prices inversely, have lately dropped to three-month lows, suggesting that investors may be moving into bonds due to concerns about the economy. Others have said that the roughly 12% decline in energy stocks from recent highs indicates that investors may be taking a downturn in the economy into account.

Banks might be dealt a double blow: Higher rates pose a danger to narrow profit margins if the income that lenders pay out on deposits eats away at the interest gained on loans, while a recession might harm loan growth and raise credit losses.

Additional hints about the pressures banks anticipate facing come from job cuts: In order to navigate a challenging economic climate, Goldman Sachs (GS.N) is going to lay off thousands of workers, a person familiar with the situation told Reuters on Friday. This makes Goldman Sachs (GS.N) the second major bank to decrease its headcount in recent months.

According to Matt Maley, chief market strategist at Miller Tabak, “bank stocks do not fare well in a recession, and more and more investors are afraid about a rough landing.”

The S&P 500 bank index is now down more than 24% in 2022, despite the fact that bank stock prices have generally tracked the S&P 500 throughout the year. The S&P 500 has lost 19% so far this year, which would be the worst annual percentage decline since 2008.

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Walter Todd, chief investment officer at Greenwood Capital, said: “The recent performance of banks is evidence to me that there is growing anxiety over the economic prognosis for 2023.” Early this year, Todd’s company sold part of its bank shares due to expectations of a downturn.

Profit margins are one possible area of concern for investors. In the third quarter, among the 20 banks monitored by RBC Capital Markets, higher rates caused net interest margins, which reflect how much a bank gets on loans and fixed income securities relative to what it pays out on deposits, to widen to their largest average differential in three years.

A portion of the recent weakness in bank stock prices, according to RBC Capital Markets analyst Gerard Cassidy, is due to expectations that net interest margins will peak next year and worries that “we are going to see increases in the provision for credit losses due to the expectation of a slowing economy in 2023.”

When banks report their fourth-quarter results the following month, the depth of this pressure will become more apparent. Another possible roadblock for the group is that, according to Reuters this week, some of the banks who lent Elon Musk $13 billion to acquire Twitter are getting ready to record losses on the loans.

When housing and consumer confidence figures are released the following week, investors will have greater insight into the state of the economy.

Of course, investors who are certain that the economy will stay steady may find the reduced shares of banks to be tempting.

According to Refinitiv Datastream, the S&P 500 banks index trades at approximately nine times future earnings projections, less than its 12-times long-term average P/E ratio and much less than the S&P 500 as a whole’s nearly 17-times P/E ratio.

According to King Lip, chief strategist at Baker Avenue Wealth Management, his company recently purchased bank equities because it believes any impact on US GDP would probably be just somewhat negative.

According to our analysis, a major recession in 2023 shouldn’t affect the economy, Lip added. “This should boost bank investor confidence.”

Lewis Krauskopf did the reporting; Jonathan Oatis did the editing

The Thomson Reuters Trust Principles serve as our benchmarks.

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