By Lewis Krauskopf
(Reuters) – Shares of US banks will take a beating in December as concerns about an expected recession and weakening profit margins weaken the sector’s appeal.
The S&P 500 banking index is down about 11% this month, compared to a 5.5% drop for the broader index over the same period. Among those hardest hit were shares of Bank of America, which are down 16% this month. Shares of Wells Fargo & Co are down about 14% and those of JPMorgan Chase & Co are down more than 6%.
Signs of pessimism about the economy have crept into asset prices in recent weeks as investors become increasingly concerned that the Federal Reserve’s most aggressive monetary tightening in 40 years – aimed at curbing inflation – will also hamper growth
Government bond yields, which move inversely with prices, have recently fallen to a three-month low, suggesting growth concerns could drive investors to bonds. Others pointed to energy stocks, which are down about 12% from recent highs, as a sign that investors may be anticipating an economic slowdown.
Banks face a potential double whammy: While a recession could hurt loan growth and increase loan losses, higher rates threaten to squeeze profit margins if the interest lenders pay on deposits eat into loan interest.
The job cuts further point to the tensions banks expect to face: Goldman Sachs plans to lay off thousands of employees to navigate a tough economic environment, a source familiar with the matter told Reuters on Friday, the latest global bank that increased its workforce in recent months.
“Bank stocks don’t fare well in a recession and more and more investors are worried about a hard landing,” said Matt Maley, chief market strategist at Miller Tabak.
While banking stocks have traded broadly in line with the S&P 500 throughout the year, their decline has accelerated in recent weeks, with the S&P 500 banking index now down more than 24% in 2022. The S&P 500 is down 19% since its early in the year, on track for the biggest annual percentage decline since 2008.
Rough December for Bank Stocks: https://www.reuters.com/graphics/USA-STOCKS/BANKS/zgvobbalbpd/chart.png
“The recent performance of banks is evidence to me that there is more concern about the economic outlook for 2023,” said Walter Todd, chief investment officer of Greenwood Capital. year.
Profit margins are a potential problem spot for investors to target. Higher rates led net interest margins — which measure how much a bank makes on loans and fixed income securities compared to what it pays out on deposits — to widen in the third quarter to their widest average spread in three years, among 20 banks followed by RBC Capital Markets.
RBC Capital Markets analyst Gerard Cassidy said part of the recent weakness in bank stocks reflects expectations that net interest margins will peak next year and concerns that “we will see an increase in loan loss provisioning due to the expectation of a slowing economy in 2023.”
The magnitude of this pressure will become clearer next month when the banks publish their fourth-quarter figures. Another possible stumbling block for the group is that some of the banks that loaned Elon Musk $13 billion to buy Twitter are preparing to post losses on the loans this quarter, Reuters reported this week.
Investors will learn more about the health of the economy next week, with data on housing and consumer confidence.
Of course, the discounted shares of banks may appeal to investors who believe the economy will remain stable.
According to Refinitiv Datastream, the S&P 500 banking index trades at about nine times forward earnings estimates, below its long-term average P/E of 12 times and significantly below the approximately 17 times for the overall S&P 500.
King Lip, chief strategist at Baker Avenue Wealth Management, said his company has recently been buying bank stocks, confident that any blow to US growth is likely to be moderate.
“Our view is that the economy should be able to avoid a significant recession in 2023…,” Lip said. “This should improve investor sentiment in banks.”
(Reporting by Lewis Krauskopf; Editing by Jonathan Oatis)