Bank stocks fell sharply Tuesday as worse-than-expected inflation data sparked a spike in Treasury yields and a drop in stock prices, while clouding the outlook for big financial institutions that hold bonds.
JPMorgan Chase & Co.
fell 3.3%, Goldman Sachs Group Inc.
dropped 3.6%, Morgan Stanley
subtracted 3.2%, Wells Fargo & Co.
retreated by 4.6%, and Citigroup Inc.
declined by 2.9%.
The Dow Jones Industrial Average
gave up 2.6% and the S&P 500
weakened by 3%. The Financial Select SPDR ETF
dropped 2.8% and the KBW Nasdaq Bank Index
dropped by 3%.
While higher interest rates typically benefit banks’ net interest income by allowing them to charge more for loans, Tuesday’s bearish Consumer Price Index also caused more uncertainty among banks that hold large bond portfolios, as prices of bonds fell.
Weaker bond prices cause banks to book unrealized losses on the value of their bond portfolios and in turn cause bank capital ratios to decline. Treasury prices move in the opposite direction to yields.
While higher rates have been boosting bank’s net interest income, bank stocks have been weak in 2022 partly because of worries that inflation will continue to cool the economy and reduce economic activity, which in turn impacts activity in the financial sector.
“Rising interest rates, longer asset maturities, and high levels of securities on bank balance sheets may present challenges for the banking industry in coming quarters,” acting FDIC chief Martin J. Gruenberg said last week in the government’s quarterly bank profit summary.
In another complication in the banking sector, total deposits in the second quarter declined for the first time since the second quarter of 2018. The decline totaled $390 billion, a record, to $19.563 trillion in the second quarter ended June 30, down from $19.932 trillion in March.
While banks still have more deposits than they want, the Wall Street Journal reported that outflows in deposits will likely spark questions over the impact on the banking system from the Fed’s attempts to tame inflation.
The overall uncertainty in the economy will do little to stop a nascent effort by banks and other lenders to trim staff.
The job impact was initially felt by mortgage lenders as higher interest rates discouraged home buying earlier this year.
Now with initial public offerings and other capital market deals on hold, investment banking is also expected to generate job losses.
Goldman Sachs Group Inc. is moving to trim hundreds of investment bankers and other staff by reintroducing its traditional annual performance reviews, according to a source familiar with the banks.
Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. are all shedding jobs as well in their mortgage businesses and other units. That’s a reversal from the second quarter, when head count numbers climbed.