Why are bank stocks down

Why are bank stocks down

As coronavirus continues to spread across the globe, the economic impact has become undeniable. Instead, current conditions could create a buying opportunity for those with a stomach for risk. The consultancy warned that rising competition from fintech coupled with rising costs has left the sector totally unprepared for an economic downturn.

At the time, the downturn McKinsey was talking about was expected to be far more gradual. Last year, many were expecting to see far more consolidation within the financial sector but very little materialized.

Wells Fargo analyst breaks down his outlook on bank stocks amid coronavirus outbreak

But banks were unwilling to give up their individual identities unless absolutely necessary. Typically, banks generate over half of their net revenue by net interest income— the difference between the interest the bank is charging borrowers and the interest the bank itself pays for its supply of money.

When rates are low, banks are earning less money on every loan they make. In his view, the mass exodus from big banks is overdone:. Albertson is probably right, big banks are unlikely to go under. Investors with an appetite for risk might find it useful to evaluate potential takeover targets in the financial sector.

Times are about to get exceedingly tough for regional banks, making them prime acquisition candidates. Beyond that, bank stocks with low return on equity are likely to explore potential mergers as they will benefit most from the cost synergies that consolidation offers. Looking at that criteria, there are several regional banks that look likely to be exploring a potential merge:.

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Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN. The above should not be considered trading advice from CCN. As of this writing, the author did not hold a position in any of the aforementioned securities.

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Editor: Aaron Weaver — aaron.The stock market is getting hammered on Tuesday. Bank stocks are getting hit even worse. Most other major bank stocks are also underperforming the major averages by a significant margin.

The driving force behind the underperformance in bank stocks isn't the market weakness or coronavirus fears themselves. Instead, bank stocks are responding to the fact that benchmark interest rates have taken an unprecedented nosedive.

Here's why it matters to bank-stock investors. While all of the big banks make money in a variety of ways, at their core they still rely on interest income to fuel their profits.

In other words, the heart of the banking business is borrowing money at a low cost and lending it to customers at a higher cost. The difference between the interest rate a bank pays for its capital and the interest rate charged to borrowers is the bank's interest margin. When interest rates fall, that's generally bad for interest margins.

After all, banks can't realistically reduce the interest they pay on deposits below zero, but if market interest rates drop, they'll earn less income on things like auto loans and credit cards. Some banks are more susceptible than others -- for example, Bank of America has a higher concentration of non-interest-bearing deposits when compared to the rest of the big banks, which is a major reason it's the worst performer of the three banks I mentioned earlier.

The true cost of the recent interest-rate plunge on bank earnings, and how long the low rates will persist, are anyone's guess at this point. However, investors can expect that the recent drop in benchmark interest rates will result in lower-than-expected profits from the big U. If the low rates last longer, we could see bank profits take an even deeper hit. And we're seeing this probability reflected in their stock prices. Investing Best Accounts.

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why are bank stocks down

Image source: Getty Images. Stock Advisor launched in February of Join Stock Advisor. Related Articles.The analyst explained that banks are experiencing four "year events" at the same time: The decline in net interest margin, traditional banking revenues, and total revenues are each the worst in a century.

And, the buildup in reserves has been the highest in history. He said that he thinks the foundations of the banks are strong, and earnings could be like a "coiled spring" if and when there's positive light on the economy or a vaccine for the coronavirus. Read more: Tom Marsico's growth fund has crushed its benchmark for 13 years - and returned 28 times its peers in Here's what he's been buying, and the beaten-down stocks he plans to grab after the pandemic. Mayo said the billionaire investor has purchased shares in Bank of America for 13 days in the last three weeks.

Buffett now has an Mayo added that he thinks the largest banks, including Bank of America, JPMorgan, and Citigroup, are capturing more share in digital banking and they have more scale than smaller banks to control expenses.

Bank Stocks Still Face a World of Hurt. One Analyst Explains Why.

He added that his one word for banks would be "strength. Emily Graffeo. He explained that banks are experiencing the highest buildup of reserves in history. Mayo said that he thinks the foundations of the banks are strong, and earnings could be like a "coiled spring" if and when there's positive light on the economy or a vaccine for the coronavirus. Visit Business Insider's homepage for more stories.

Find News.Banks are beginning to report earnings. First, the soft economic data we saw Friday — retail sales, but particularly the Consumer Price Index — clearly lowered the chances for a Fed rate hike later in the year.

That brought down Treasury yields, which is lowering the chances for increased profits from one of the primary profit centers for banks — interest income.

Less well-known is a seasonal phenomenon: Banks tend to trade up in the month before JPMorgan's earnings report, trade slightly down on the day of the report and are generally flat in the month after. One month before JPM: up 1. Note that even a month after JPMorgan reports, banks tend to be down slightly down 0. Bottom line: Expect some downward earnings revisions on second half bank earnings around lower interest income, but factor in the seasonal weakness as well.

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why are bank stocks down

Skip Navigation. Markets Pre-Markets U. Key Points. Four banks reporting earnings beat their expectations, but all are trading down. New data lowered the chances for another Fed rate hike, which lowered the chances for profits from interest income.

Seasonal factors also explain why banks are trading down. So why are they all trading down Friday? Related Tags.

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why are bank stocks down

We want to hear from you. Get In Touch. CNBC Newsletters. Market Data Terms of Use and Disclaimers.Many bank stocks, including some of the largest U. These included U. During that time, Truist's shares were down by Bancorp's shares tumbled First, on March 3, the Federal Reserve implemented a half-percent interest-rate cut to the target federal funds rate.

That was the biggest cut in years, and it was bad for banks because it reduced the amount of interest they could charge on loans, the bread and butter of commercial banks' income. That's the lowest it can go without going negative, and investors punished bank stocks. Unfortunately, there were still more problems in store. In late March and early April, states began shutting down their economies to contain the spread of COVID, resulting in massive job losses.

High unemployment often leads to customers defaulting on their loans, and coupled with the economic uncertainty and the shutdowns' impact on small businesses, demand for new loans was expected to dry up.

While many stock market sectors experienced a swift recovery after the March crash, bank stocks have continued to languish. That situation is likely to continue until it becomes clear that the worst of the coronavirus pandemic is in the rearview mirror.

Despite the market's reaction, these three banks have actually done pretty well for themselves operationally.

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PNC CEO William Demchak has indicated he will potentially use the cash to make an acquisition, although he may want to keep some of it on the balance sheet to offset potential loan defaults. Speaking of loan defaults, all three banks have already increased the amount of cash they're holding on their balance sheets as loss provisions for such defaults. Otherwise, though, Truist posted comparatively strong results in its first quarter.

Bancorp, meanwhile, also outperformed expectations in Q1 and is well capitalized. It has already announced it will maintain its dividend payout in Q3. PNC has pledged the same. The just-merged Truist is still trying to decide.This copy is for your personal, non-commercial use only. Longer term, he expects that banks will be hurt by higher tax rates and few share repurchases amid a period of low rates and credit losses. The banking sector is plagued by other unknowns as well, including the forbearances and other accommodations banks granted borrowers at the onset of the crisis.

With the three- to six-month time frames of these measures rolling off, the banks may see higher than expected credit losses. Details about the forbearance programs -- including what percentage of clients actually maintained payments -- have been spotty across the sector, causing investors to fear the worst. And even big-time investors have soured on the sector.

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Google Firefox. Sign In. Text size. One Analyst Explains Why. Wall Street continues to take a dreary view of bank stocks. Thank you This article has been sent to.

Privacy Notice. Cookie Notice. Copyright Policy. Data Policy. Your Ad Choices. All Rights Reserved. All Rights Reserved This copy is for your personal, non-commercial use only.There's no love lost for Ari Wald, head of technical analysis at Oppenheimerwho has a warning on bank stocks.

why are bank stocks down

They are breaking down from a much weaker structure. Now they are trying to base, and I do think that is still in play even with today's pullback, but more is needed. Zoom In Icon Arrows pointing outwards. Even though they're not practicing yield-curve control, they are de facto creating yield-curve control, and it's the fact that nominal rates are so flat that's truly killing the banks," Schlossberg said during the same interview. The yield curve affects a bank's profitability as it compresses how much it earns when it borrows short term and lends long term.

The spread between 2- and year Treasury notes is currently 53 basis points. In my opinion, that's probably your best bet given the situation right now," said Schlossberg. Sign up for free newsletters and get more CNBC delivered to your inbox. Get this delivered to your inbox, and more info about our products and services. All Rights Reserved.

Here's Why Big Bank Stocks Are Falling on Tuesday

Data also provided by. Skip Navigation. Markets Pre-Markets U. VIDEO Trading Nation: Bank stocks hit hard in sell-off, here's how to trade the sector. The banks are breaking down again. Related Tags. Stephanie Landsman 4 hours ago. High-flying cloud stock Twilio could have more room to run, trader bets. Keris Lahiff. Read More. News Tips Got a confidential news tip?

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