Key Takeaways
- Bank stocks tumbled on Monday as last week’s sell-off extended into the new week amid concerns about the rising risk of a U.S. recession and a weakening consumer outlook.
- The S&P Banks Select Industry Index dropped more than 5% early Monday, outpacing the 3% decline for the wider financial sectors
- Net interest income surged in the wake of rising interest rates in recent years but has recently come under pressure as loan balances have shrunk and deposit costs have risen.
- Rate cuts by the Federal Reserve would decrease the interest banks pay on deposits, but Wall Street is worried that benefit would be offset by the costs of a recession.
Bank stocks tumbled on Monday as last week’s sell-off, prompted by a weak jobs report on Friday, extended into the new week amid concerns about the rising risk of a U.S. recession and a weakening consumer outlook.
The S&P Banks Select Industry Index dropped more than 5% early Monday, outpacing the 3% decline for the wider financial sectors. Shares of America’s largest lenders, JPMorgan Chase (JPM) and Bank of America (BAC), were down 2.5% and 4%, respectively. Citigroup shares fell 5.5%.
Stocks slumped on Friday after the July jobs report showed the unemployment rate jumped to 4.3%, triggering the “Sahm rule” recession indicator and raising concerns that the Federal Reserve erred last Wednesday when it chose not to cut interest rates.
Elevated interest rates have mostly been a boon to America’s largest lenders. Net interest income, the difference between the interest banks collect on loans and the interest they pay to depositors, surged in the wake of rising interest rates but has recently come under pressure as loan balances have shrunk and deposit costs have risen.
Rate cuts by the Federal Reserve, which are widely expected to happen soon, would decrease the interest banks pay on deposits, but Wall Street is worried that benefit would be offset by the costs of a recession.
Banks have been steadily adding to their provisions for credit losses, a sign lenders are increasingly concerned borrowers won’t be able to pay back their loans. Friday’s jobs report ramped up anxiety that the U.S. is slipping into a recession that could put substantial stress on banks’ loan books.