Despite the dramatic turnaround from the low point in March, not every sector took part in the rally. American banking stocks, among others, have lost ground.
Investors shied away from stocks of financial institutions this year out of concern that one of the worst recessions in US history will crush profitability and result in rising credit losses. While the overall economic outlook has improved significantly since the pandemic outbreak, banking stocks continue to suffer.
As a measure of how hard bank stocks have been hit, the decline this year is more than 30%. Looking to the future, investors only need to consider Federal Reserve interest rates to determine how long it will take most banks for their earnings to return to pre-pandemic levels.
According to media reports, the Fed has unanimously approved a new strategy that sets aside the practice it has followed for more than three decades of preemptively lifting interest rates to cope with higher inflation. will put.
In the most ambitious revision of the Fed's policy-setting framework since it was first approved in 2012, the new direction is likely to keep interest rates low for years, as the central bank sometimes lets inflation run faster than traditionally allowed .
Depressed Interest Income
An economic environment that supports low interest rates over a long period of time is not conducive to bank profits, which depend on capturing the spread between what they earn from loans. and what they pay in deposits, also known as net interest income (NII).
That argument is especially true of the lenders that do not have diversified business activities, such as trading and mergers and acquisitions. Wells Fargo (NYSE 🙂 is in a weak position for recovery among the top US banks.
Hurt by this pressure, the third largest US bank posted the first since the 2008 financial crisis in July. During the period, the NII in the second quarter was $ 9.9 billion, compared to $ 12.1 billion a year ago.
With the Fed firmly on track to keep interest rates lower, there is little hope that this situation will improve any time soon, as Wells Fargo has no trading activity on Wall Street that could make up for weakness elsewhere.
2 Banks that stand out
While macroeconomic conditions remain unfavorable for banks, there are still few players who can survive this downturn better than their peers. JPMorgan Chase (NYSE 🙂 and Bank of America (NYSE 🙂 are among them due to their strong balance sheet and the quality of their operations.
JP ??Morgan Chase 1 Year Review.
JPM, for example, saw unit out of the market rise 79% from a year ago, while investment banking fees rose 91% in the second quarter.
Bank of America – which has fallen nearly 26% so far – was supported by stronger-than-expected bond trading and investment banking income. Bond income was up 50% and equity trading income was up 7%.
Bank of America 1-Year Chart.
Bottom Line
A long-term low interest rate environment is generally negative for bank stocks as it will continue to push the spread on their credit products. That said, some lenders are in a better position to perform due to their diversified operations and strong balance sheets. JPM and BAC are two such stocks.
