The largest banks in the United States are entering an uncertain phase. Falling interest rates, low trade volumes and a threat to the world economy as a result of the trade war between the US and China create headwinds that could quickly damage their earnings and cloud their future
These risks already lead to a sell-out of bank shares, as investors shun shares that are cyclical and closely linked to the health of the global economy. It has fallen by more than 5% compared to this year's high reached in early May.
In the past year, bank shares have fallen enormously behind the. This reference index has gained around 4%, while the KBW index has fallen by around 12% over the same period.
KBW NASDAQ Bank Index price chart
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Bank shares – which reflect the overall performance of the economy – can also be an early warning signal for other sectors of the economy that depend on consumer and business spending. At the beginning of this year, for example, the stocks of the lenders rose to show signs of continued economic expansion in the US
.
But that optimistic scenario is changing rapidly. The US Federal Reserve has clearly stated that it does not want this year and the next step could be a reduction
As a result of these bearish sentiments, the return on the Treasury note has fallen to its lowest level since the fall of 2017. Falling interest rates narrow the gap between what banks charge borrowers and what they pay depositors, a known spread as the net interest margin.
Profit in the second quarter runs a risk
At a branch conference this week, bank executives warned investors at some of the top financiers in the US about the profit lag.
"I would be very surprised if we beat," Morgan Stanley (NYSE 🙂 Chief Executive Officer James Gorman was quoted as saying at the conference.
Said Gorman:
"The past two weeks have been pretty difficult. Until then, it was solid. We don't have a bad quarter in the securities trade, but you have to be realistic with the environment."
Citigroup Inc.
(NYSE :), on the other hand, expects its income from fixed-income securities and shares to fall by a percentage in the "mid-range, single-digit" of a year ago, while investment banking costs are expected to fall by a percentage in the "mid-teens , "according to his Chief Financial Officer Mark Mason.
When looking at individual bank shares, some are tumbling more than the broader market. Wells Fargo & Co. (NYSE 🙂 has fallen by more than 10% in the last six months, while Bank of America Corp. (NYSE 🙂 lost 4% in the same period.
But the acid mood around bank shares does not mean that investors have to paint all names with the same brush. Shares of some of the largest donors have become attractive after years of restructuring efforts, within a more robust regulatory environment. In this space we especially love Citigroup and JPMorgan Chase & Co. (NYSE :).
They have outperformed most of their peers in the last six months, with Citigroup at 19% in the period and JPM at over 8%. Yesterday Citigroup increased by 0.42% and closed at $ 67.09 and JMP fell 0.28% higher, and closed at $ 109.58.
Citigroup price tag
JPM Price Tag
These banks are well prepared for any cyclical downturn due to their ongoing cost savings over the past decade and the rebalancing of their portfolios. Their efforts are starting to pay off and both have shown strong growth in revenue and profit in recent quarters.
Bottom Line
It is certainly not a good time to go long on bank stocks when the macroeconomic headwind is approaching. But in the case of long-term weakness, we advise investors to prepare for choosing a number of solid bank shares. We appreciate both Citi and JPMorgan for such investors, given their profit momentum, increasing dividends and an improvement in the balance sheet quality.
