Shares of Citigroup C, JPMorgan & Chase JPM and other big banks tumbled in the last trading session after a dismal July jobs report raised concerns about the economic slowdown.
Other large banks like Bank of America BAC, Wells Fargo WFC and Goldman Sachs GS stocks also closed lower on Friday.
C’s shares fell 6.5%, while BAC and JPM shares, the two biggest U.S. lenders, were down by 4.1%. WFC stock fell 5.6%, while GS stock was off 5.3%.
Interest rate-sensitive sectors, including the SPDR S&P Regional Banking ETF, also slid 3.7%. The risk-off tone extended beyond financials, with major U.S. stock indexes falling on fears that the economy is heading for a hard landing.
The swings come after The Bureau of Labor Statistics reported that U.S. employers added considerably fewer jobs than predicted in July. Per the report, U.S. nonfarm payrolls added 1,14,000 jobs in July, lower than the 1,80,000 expected by economists.
Also, the unemployment rate rose to 4.3% in July from 4.1% in June. The declining rate of job growth and increasing unemployment rate imply that the U.S. economy is slowing down. This will lead the Federal Reserve to cut interest rates in future meetings.
The Fed kept its influential lending rate at its highest level since 2001 to tame inflation. Last week, at the end of the two-day FOMC meeting, Fed chairman Jerome Powell acknowledged progress on inflation and signaled that the central bank could be in a position to cut interest rates as soon as September.
Following the release of a weaker-than-expected job report, the CME Fedwatch data showed unprecedented changes. Now, market participants are projecting a 96.5% chance of a 50-basis point cut in interest rates in September, marking an increase of an 11.4% chance a week ago.
After a prolonged period of historically low interest rates, interest rates rose dramatically in 2022, causing an abrupt shift in banking conditions. With loan demand growing rapidly, higher interest rates initially supported growth in net interest income (NII) and net interest margin (NIM). Banks reaped huge benefits in the form of higher NIM and NII during the initial phase of high rates. However, challenges related to slowing loan growth, increased funding costs and reduced liquidity became more apparent by first-quarter 2023.
In 2022, NII increased by almost 20% for banks compared with 2021 levels, while the metric increased around 10% in 2023 from 2022. NIM also increased sharply in 2022, while the rate of increase fell in 2023.
During the first half of 2024, high funding costs started to put pressure on NII and NIM and the lending scenario was muted. In the first half of 2024, NII and NIM declined from the prior level.
High rates have proven to be a major challenge for lenders struggling with high costs of funding, lower-yielding securities and their exposure to the weaknesses of commercial and consumer borrowers. High rates have also reduced lending activity, making it more difficult for banks to sustain profits.
The banks have been waiting two years for rates to come back down. On the bright side, lower interest rates are expected to encourage consumers and businesses to borrow. Such increased loan activity can result in larger profitability for banks because they earn more interest on these loans.
However, lower interest rates can narrow the spread between what banks pay on deposits and what they make on loans (i.e., the net interest margin), possibly reducing bank earnings in the near term. Banks frequently keep huge amounts of fixed-income securities, which give lesser profits when interest rates are reduced.
Even though the rate cut offers hope to U.S.-based banks that the lending scenario could improve, it will take a longer time to reflect the benefits of the same to be visible in their financials.
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The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
Bank of America Corporation (BAC) : Free Stock Analysis Report
Wells Fargo & Company (WFC) : Free Stock Analysis Report
JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
Citigroup Inc. (C) : Free Stock Analysis Report
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