Bank stocks take big hit as trade war fears escalate

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Bank stocks took a pounding on Monday, along with the rest of the stock market, as investors worried that the ongoing trade war between U.S. and China could jolt the economy.

The Keefe, Bruyette & Woods Nasdaq Bank Index, which tracks large and regional bank stocks, dropped 3.63% on Monday. The KBW Bank Index has now declined more than 8% since July 26.

Bank of America was among the largest decliners, falling 4.42% to $28.08 per share. Citigroup dropped 3.59%, JPMorgan Chase declined 2.98% and Wells Fargo dropped 2.74%. The $43 billion-asset East West Bancorp in Los Angeles, which is heavily involved in U.S. and Chinese trade, fell 4%. The Dow Jones industrial average fell 2.9% on Monday, and the S&P 500 Index fell 3%.

The trade dispute, which China escalated on Monday by letting its currency depreciate and cutting off purchases of U.S. soybeans, and the Federal Reserve’s 25-basis-point rate cut last week, have placed great pressure on bank profits, said Brian Foran, an analyst at Autonomous Research.

“More fighting with China equals more rate cuts equals more net interest margin pain for banks,” Foran said.

After the rate cut, banks’ existing portfolios of floating-rate loans will switch to lower rates, likely shrinking their net interest margins. Banks must also originate new loans at the lower rates. However, banks can defend against those pressures by lowering rates paid to depositors.

If the trade war persists, or even expands into a currency war between the U.S. and China, it could spread to the rest of the economy, said Marty Mosby, an analyst at Vining Sparks. That wouldn’t be good for banks.

“What we are doing is inciting the anxiety and fear that something will lead to the next recession,” Mosby said.

Large banks got an additional bit of bad news on Monday, when the Federal Reserve announced that it will build and operate a real-time payments system to compete directly with one developed by big banks. The FedNow service, slated to launch by 2024, will compete with The Clearing House, which large banks developed and have operated since 2017.

While the Fed’s real-time payments network announcement was not the main driver of banks’ stock declines Monday, it did impact both Visa and Mastercard, Foran said. He suggested that investors fear the payments giants could lose processing business to the Fed's service.

Visa shares dropped 4.8% to $168.86 and Mastercard fell 4.7% to $256.84.

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