Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Despite Rising Interest Rates, Banks Remain A Risky Bet

By Investing.com (Haris Anwar/Investing.com)Stock MarketsJun 03, 2022 04:45PM ET
www.investing.com/analysis/despite-rising-interest-rates-banks-remain-a-risky-bet-200625255
Despite Rising Interest Rates, Banks Remain A Risky Bet
By Investing.com (Haris Anwar/Investing.com)   |  Jun 03, 2022 04:45PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
  • The KBW Bank Index, which surged 35% in 2021, is now down more than 12%, despite strong consumer spending and rising interest rates
  • JPMorgan’s CEO Jamie Dimon sees an economic “hurricane” on the horizon
  • If you’re interested in upgrading your search for new investing ideas, check out InvestingPro+

One of the hottest trades in the market since the COVID-driven crash of 2020, the US banking segment, seems to have taken a turn for the worse this year. After surging 35% in 2021, the broad KBW Bank index is now down more than 12% year-to-date.

KBW Bank Index Weekly Chart
KBW Bank Index Weekly Chart

Losses in the industry have been led by some of the largest lenders in the market, with Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) slumping around 17% each.

The decline raises eyebrows as banks, in theory, thrive when the central bank raises interest rates due to higher income from lending products, such as loans, mortgages, and credit card debt.

For instance, the last time the Federal Reserve started raising rates at the end of 2015, bank stocks sharply outperformed the S&P 500 over the next two years.

However, now that we are beginning what many believe will be one of the most aggressive monetary tightenings, banking stocks are falling. So why are investors dumping the sector?

One explanation is the risk of a recession which could remove many growth drivers for banks and neutralize the boost coming from higher interest rates. In this scenario, rates are rising, but consumers and businesses are struggling, either not borrowing as much or defaulting more often.

“Hurricane” Is on the Horizon

The warning for such a dreaded scenario comes from no one else but banks themselves. JPMorgan’s CEO Jamie Dimon warned investors yesterday to prepare for an economic “hurricane” as the economy faces challenges, including tightening monetary policy and Russia’s invasion of Ukraine.

Dimon said at a conference sponsored by AllianceBernstein Holdings Wednesday:

“That hurricane is right out there down the road coming our way. We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.”

There are also signs that lenders are struggling to increase their incomes after several quarters of robust growth on the earnings front. Bank of America in April reported a 12% drop in first-quarter profit, followed by JPMorgan, Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC)—all reporting double-digit declines in first-quarter earnings. All except Bank of America reported lower revenue.

The deal-making that had powered the industry’s investment bankers started to slow on Wall Street. After two years of pandemic-related disruptions, the last quarter was supposed to return to normal for US banks. Instead, Russia’s invasion of Ukraine also threw new hurdles into the global economy’s path to pandemic recovery, upending stock trading and commodities markets alike.

Due to those results, Morgan Stanley’s strategists recently downgraded the entire financials sector late in March, telling investors to prepare for slower US growth.

The silver lining is that consumers and businesses appear to remain financially healthy. Lending was up at many banks during the first quarter, a welcome turnaround after two years of tepid loan demand during the pandemic. Bank of America, the largest US bank, sees loan demand rising for new and existing credit products.

Bottom Line

With risks to economic growth rising and the future outlook turning more uncertain, investors don’t see bank stocks outperforming the market this year. However, many favorable growth drivers could still keep bank stocks supported, such as improving credit demand and higher margins on their lending products.

***

Interested in finding your next great idea? InvestingPro+ gives you the chance to screen through 135K+ stocks to find the fastest growing or most undervalued stocks in the world, with professional data, tools, and insights. Learn More »

Despite Rising Interest Rates, Banks Remain A Risky Bet
 

Related Articles

Despite Rising Interest Rates, Banks Remain A Risky Bet

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (4)
Meru Pet
Meru Pet Jun 04, 2022 11:24AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
For some reasons I can't comment with the app. This is with a browser.
Parveen Tiwari
Parveen Tiwari Jun 04, 2022 10:42AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
True
محمد الحويطات
محمد الحويطات Jun 03, 2022 4:11PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
مرحبا
jason xx
jason xx Jun 03, 2022 5:27AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Was Dimon drunk when he said this? Who cares what he thinks he doesn't know what is going to happen either.
KC Can
KC Can Jun 03, 2022 5:27AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
In financial markets, anything can happen, so he is saying the obvious. just hope that people are not too complacent to keep fueling the assets bubbles
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email