Big U.S. banks are under pressure again, as policy-makers around the globe have dashed any hopes that the industry might finally be able to earn more money on loans after more than a decade of rock-bottom interest rates.
On Wednesday, central banks in New Zealand, India and Thailand slashed their benchmark rates to prop up their economies and stave off recession. Those moves followed the U.S. Federal Reserve’s decision last week to cut its key rate for the first time since the 2008 financial crisis.
The changes have stung major lenders, the executives of which have long complained about the impact of low rates on lending income.
During second-quarter earnings calls last month, executives from several major U.S. lenders softened outlooks for net interest margins, some for the second time in 2019, according to the research firm Portales Partners. Meanwhile, Treasury yields fell to a near-record-low on Wednesday, with futures markets predicting the Fed will cut rates another three times by year-end.
“This is a dangerous situation,” said Peter Boockvar, chief investment officer for Bleakley Advisory Group, a wealth management firm with US$4.5-billion in assets under management. “The global economy is slowing down dramatically, so the banks will get banged twice.”
Bank stocks led a decline in major U.S. indexes on Wednesday, with blue-chip lenders JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Morgan Stanley all down 3 per cent to 4 per cent. Goldman Sachs Group Inc. was down 1.7 per cent.
The S&P 500 Bank index was down 3.4 per cent on Wednesday. The index has fallen four out of the last five days and has fallen about 9.7 per cent since July 26.
It is a sharp reversal from the beginning of 2019, when Wall Street had been optimistic about the sector, predicting that banks would ride the coattails of a booming U.S. economy. But the escalating trade war between the United States and China, combined with softer economic data globally, have led economists to rein in estimates for growth as well as corporate earnings.
Analysts and investors contacted by Reuters on Wednesday issued a cautious tone about U.S. banks.
On one hand, narrowing interest margins will hurt, forcing banks to lean harder on fee-based income and potentially embark on another round of cost cuts. On the other hand, market volatility can be good for trading operations, and U.S. banks are in a better position than European rivals to withstand the economic stress.
“They are in a better shape to deal with lower rates,” said David Hendler, founder of research firm Viola Risk Advisors.
He ticked off a list of businesses big banks can depend on besides traditional lending, including trading, prime services, underwriting and deal making.
But, for now, David Joy, chief market strategist at Ameriprise Financial in Boston, said he is avoiding the sector. Even though U.S. bank shares have become less expensive, he said, there is a good chance things will get worse before they get better.
“Banks are probably going to remain under pressure here,” he said. “They do best when the economy is reaccelerating, and we seem to be going in the opposite direction.”