Coronavirus Rises Recession Fears: What It Means For Banks

Coronavirus and concerns surrounding its impact on the global economy resulted in the end of the 11-year bull run on Thursday for all the three major U.S. indexes. This followed the World Health Organization’s declaration of the coronavirus as pandemic.

On Thursday, the S&P 500, Nasdaq and the Dow Jones plunged to their historic lows, with both Dow Jones and S&P 500 witnessing the biggest drop in more than three decades. Though the Federal Reserve unveiled measures including injecting liquidity into Treasury markets, investor sentiments remained bearish.

So far this year, the S&P 500, Nasdaq and the Dow Jones have tanked 23.2%, 19.7% and 25.7%, respectively, paring last year’s impressive gains.

With the U.S. economy being adversely impacted by coronavirus, Alan Blinder — a former Federal Reserve vice chairman — believes that the country could be already in recession. Earlier this week, he told CNBC’s ‘Squawk Alley’ that “I wouldn’t be one bit surprised if when we look back at the data, it is decided ... that the recession started in March.”

Further, Pacific Investment Management Co.’s (PIMCO) global chief economic adviser, Joachim Fels believes that the United States and Europe are facing the “distinct possibility” of a recession. Though the current economic data shows that the U.S. economy is standing strong, one of the biggest concerns is how coronavirus-related slowdown will affect future activities.

Here’s What This Means for Banks

We all know that banks’ financial performance is largely dependent on the nation’s economic health. Thus, fears of recession in the United States and global economic slowdown will have an adverse impact on the performance of banks.

This is likely to result in lower demand for loans, owing to reduced business activities. Also, it could lead to a rise in delinquency rates. Thus, banks’ asset quality is expected to deteriorate.

To make matters worse, the Fed has already cut rates by 50 basis points this month in an unscheduled meeting. There is a high chance of another interest rate cut when Fed officials meet for the two-day FOMC meeting on Mar 17-18, with a few economists projecting rates to be slashed to zero from the current 1-1.25%.

For banks, one of the biggest beneficiaries of rising interest rates, this is bad news. Banks earn net interest income by charging borrowers higher long-term interest rates, while doling out smaller interest rates to depositors. This results in improvement in net interest margin (NIM). However, growth in banks’ net interest income is expected to get hampered over time owing to lower rates. This could result in decline in NIM as well.

So far this year, both SPDR S&P Regional Banking ETF (CSE:KRE) and SPDR S&P Bank (NYSE:KBE) ETF KBE have plunged more than 40%. Further, major banks including JPMorgan (NYSE:JPM) , Bank of America (NYSE:BAC) , Wells Fargo (NYSE:C) and Citigroup (NYSE:C) are trading at a significant discount. Year to date, shares of these behemoths have tumbled more than 35%, with Wells Fargo being the worst performer.

Year to Date Price Performance

With shares of all banks — big and small — having taken a huge beating, this provides investors with good entry points for fundamentally strong banks. Still, they should check out individual company fundamentals and keep an eye on near-term matters before taking any decision.

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