Bank stocks rallied in 2021, gaining more than 30% on expectations for higher interest rates. When rates rise, banks typically earn more on their bread-and-butter business of lending.
Now that the Federal Reserve is in fact boosting rates, however, banks’ stock prices are
There is no single explanation. But for starters,
The U.S. economy grew at a rate of 5.5% in 2021 as the country quickly climbed back from a pandemic-induced slump after
The U.S. Labor Department said the consumer-price index in April held near a
You can’t collect more interest if you aren’t making new loans.
This, in turn, galvanized Fed policy makers to raise interest rates twice this spring, with vows for several more increases to follow to tame inflation. With an aggressive rate hike policy comes the risk of overreaching and driving the economy into recession. The war in Ukraine adds further risk, given the potential for Russia’s aggression to spread further into Europe and
Recessionary headwinds could tamp down loan demand and, by extension, prevent banks from fully capturing the benefits of higher rates.
“You can’t collect more interest if you aren’t making new loans,” said Mike Matousek, head trader at U.S. Global Investors.
Gross domestic product decreased at an annual rate of 1.5% in the first quarter, according to the latest estimate released by the U.S. Bureau of Economic Analysis.
A slumping economy also raises credit quality concerns. During recessions, the number of borrowers who struggle to make credit payments often jumps, forcing banks to charge off souring loans and absorb losses.
Raymond James’ bank analysts met in May with chief credit officers from several banks and walked away with a mixed view. “While the jury is still out, we generally sensed cautious optimism on overall credit trends as we move into the back half of the year, although the outlook into 2023 is opaque at best,” the Raymond James team said in a report.
At the same time, over the course of the past couple years, banks amassed elevated levels of deposits as both businesses and consumers saved more during the pandemic. Many banks put excess cash to work by investing in securities. This helped earnings last year, when stocks rallied, but with the broader market slumping much of 2022, the value of banks’ securities is under pressure.
Additionally, with bank stocks bruised this year, another key catalyst for lenders —
There were only nine U.S. bank M&A deals announced in April, according to S&P Global. It was the weakest month of activity since July 2020, and it was down from 24 in the same month a year earlier. Banks often use their stock, when priced attractively, to pay for acquisitions. But with their shares down substantially this year, many would-be buyers have moved to the sidelines.
Still, for all these concerns, the U.S. economy is expected to show resumed growth in the second quarter, likely supporting continued business-owner investments in expansion — and loan demand to finance such growth, said Robert Bolton, president of the bank investor Iron Bay Capital. The Atlanta Fed last week forecasted 1.9% GDP growth for the second quarter.
“When I talk to bankers — and I’ve had multiple conversations recently with people from various parts of the country — most are concerned about inflation,” Bolton said. “But most also say that economic activity is bustling. As long as that continues into the second half of the year, I think banks will be able to capitalize on the rising rate environment, and the story for bank stocks could meaningfully improve.”
