International

Not Banking On Bank Stocks

The macro concerns that have dominated equities globally have been key in inducing investors to sell bank stocks in recent days.

Among the issues making investors skittish in the sector, according to The Wall Street Journal: slowing economic growth that is becoming a global phenomenon, a continued slump in the energy patch, and interest rates that are not going to do much to boost bank results.

In fact, a rebound in the markets Monday – well, of sorts, because it was off steep lows – masked the fact that banks took it a lot harder than general equities, with some of them down mid-single digits against indices that slipped a little more than 1 percent. Contrasting that with Morgan Stanley off nearly 7 percent, and Citi off 5 percent. The drops extended across the pond, with the Euro Stoxx Index off 3.5 percent on Monday. 

First: Rates. Various sources have projected that there may not be all that many rate increases on the near term horizon from the Federal Reserve in the near term, if at all. That does not bode well for margins at banks, as they need higher rates to earn more on funds they lend out, increasing the spread, and the U.S. Treasury level, at 1.74 percent, is at levels not seen in a year.

Next: Energy. Banks carry a lot of loans on the books tied to the energy sector, which of course had a boon as oil touched new highs years ago (and how very long ago that seems!), and those loans are still on the books. What happens if losses translate into complete writeoffs?

Thus far, noted The Journal, bank executives in the current earnings season are not all that worried about a U.S. recession, at least judging by commentary on conference calls.  The institutions, after all, continue to lend, and we are not on the cusp of 2008 (soon? Yet? Ever?). 

Nonetheless, investors are acting like they are waiting for some sort of shoe to drop, and one with a big sole. Bank stocks overall, as measured by the KBW  NASDAQ Bank Index, which follows large lenders based in the U.S., is off 19 percent so far this year. Many names are down more than 20 percent. Credit vehicles that offer insurance on debt outstanding owed by these banks – via credit default swaps – are seeing costs skyrocket, another sign of nervousness. The costs for this insurance are at levels not seen for a few years, and there are some ominous signs gathering in Europe as borrowing costs in nations such as Spain are on the rise. Oh, and Japan now has negative rates on fixed income instruments.

For now, the U.S. may be weathering a fundamental storm better than elsewhere – but the question is, will investors care?

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