In a noteworthy turn of events, the index tracking the largest U.S. bank stocks has dipped below a level not witnessed since the First Republic Bank’s collapse in May. This decline comes as the banking sector grapples with the challenges posed by higher interest rates, which have cast a shadow on their earnings prospects.
The KBW Bank Index experienced a 2.3% drop on Friday, closing at a level last seen in September 2020. This group of 24 lenders has faced a substantial 29% decrease in value over the course of this year, with a significant portion of this decline occurring after Silicon Valley Bank’s collapse in March, followed by the demise of First Republic Bank two months later. Additionally, the recent earnings reports from major financial institutions like Morgan Stanley and Citigroup Inc. have further contributed to the sector’s troubles. In contrast, the S&P 500 has seen a 7.2% increase in 2023.
Investors have been rapidly distancing themselves from banking stocks due to a multitude of pressures that are impacting the sector’s earnings prospects. A surge in yields on long-dated Treasuries has reignited concerns about the value of securities portfolios, echoing the issues that hit regional banks in the spring. The Federal Reserve’s commitment to maintaining interest rates at two-decade highs has created uncertainty regarding profit projections for the coming year. Furthermore, in a bid to avert another financial sector crisis in the event of an economic slowdown, regulators have proposed raising capital requirements.
Piper Sandler analyst R. Scott Siefers observed, “The problem is there’s still a very wide sense of skepticism about the group’s prospects. It really feels like gone are the days of those panicky events of the spring. But investors have really just settled in for a long slog for the group.”
The latest decline in bank stocks comes at a precarious time for the broader market, where even tech giants, which had been driving indexes to substantial gains in the first half of the year, have started to falter. For instance, Alphabet Inc. recently experienced its worst day since 2020, and Tesla Inc. faced a 9% drop following lukewarm earnings on October 19. The S&P 500 has declined by over 10% since its July peak, and the Nasdaq 100 is down by nearly 11% from its summer high.
Bank stocks initially came under pressure earlier in the year following the collapses of Silicon Valley Bank and Signature Bank in March, leading to a 25% plummet in the bank gauge that month. Subsequently, losses deepened in May when First Republic Bank became the second-largest bank failure in U.S. history. In the summer, investors turned to larger money-center banks for safety, resulting in gains in June and July.
However, some of this stabilization was due to the removal of existential fears, supported by the Federal Reserve. But the mood has soured in recent weeks as a relentless increase in interest rates compelled investors to reassess the earnings outlook for the banking sector.
“We were in the acute phase of a disease back in the spring, and now we’re in the chronic phase,” Siefers noted.
With the largest banks’ stock prices now faltering, the capital-weighted KBW Bank Index is reaching new lows. JPMorgan Chase & Co. had its worst day since March 17, losing 3.6% after Chief Executive Officer Jamie Dimon announced plans to sell 1 million shares of the bank. Goldman Sachs Group, Inc.’s market capitalization fell below $100 billion, and Morgan Stanley’s shares are hovering near their lowest level since early 2021, a week after the firm’s stock plunged due to disappointing earnings. Bank of America Corp. is at its lowest level since 2020, largely due to its incorrect bet on interest rates.
Among the stocks in the KBW Bank Index that have suffered the most this year are First Horizon Corp. (down 57%), KeyCorp (down 43%), and Comerica Inc. (down 43%). Of the largest U.S. banks by market capitalization, Bank of America Corp. fell 24%, Citigroup Inc. slid 15%, and Morgan Stanley was down by 17%.
JPMorgan analyst Vivek Juneja emphasized, “Valuations may seem attractive, but there is uncertainty about the economic outlook and implications of higher for longer rates. The sector is lacking a catalyst in the near term, as commercial loans are weak, and capital markets issuance activity has also slowed down following a pick-up in September—both of these drivers are being hurt by the aforementioned uncertainty.”
