Despite another round of solid earnings reports from some of the largest US banks, US bank stocks are enduring their longest losing streak since the 2008 financial crisis.
Last week, earnings from the four biggest US banks once again provided strong evidence that American consumers and corporate clients remain financially resilient even as borrowing costs have climbed sharply. JPMorgan Chase & Co (NYSE: JPM), Bank of America Corp (NYSE: BAC), Citigroup Inc (NYSE: C) and Wells Fargo & Co (NYSE: WFC) set aside a combined $7.6 billion in credit loss provisions in the third quarter, down about 3% from a year earlier. Actual loan losses at the four banks fell 5% over the same period, while loan volumes grew nearly 10%.
Yet investors appear unconvinced. On Monday, the benchmark KBW Nasdaq Bank Index (BKX) edged lower. Data shows the index has fallen for six consecutive weeks, down 11% since early September, marking its longest weekly losing streak since the 2008 financial crisis.
The selloff in US bank stocks comes as credit managers around the world appear increasingly worried about what may lie ahead. A recent survey of credit portfolio managers at large banks and other global financial institutions found that about 60% of respondents expect global corporate default rates to rise over the next 12 months, while 85% expect credit spreads on North American junk bonds to widen over the next three months. That is a sharp increase from the survey's second-quarter results, when 40% of respondents expected corporate default rates to rise over the next 12 months and 50% expected North American junk bond spreads to widen over the following three months.
Som-lok Leung, executive director of the International Association of Credit Portfolio Managers, said in an emailed statement that credit portfolio managers "do see that investors still have some risk appetite, but they also see that a number of companies that had been barely hanging on are starting to reach the end of the road."
Morgan Stanley analysts said in a report to clients on Monday that apart from weakness in a few individual commercial sectors, bank credit conditions remain broadly "benign." Still, bank executives who spoke on earnings calls this month have generally been more cautious than they were in the second quarter. Investors' concerns center on one question — whether persistently high interest rates will ultimately strain borrowers.
Bank of America analyst Ebrahim Poonawala wrote in a report on Monday that, by the same logic, falling rates "could potentially drive a rebound in bank stocks." He added: "Ideally, that should be built on declining energy prices or easing inflationary pressures."
However, Citizens Financial Group Inc (NYSE: CFG) Chief Executive Officer Bruce Van Saun said market worries about current borrowing cost levels are "overblown." Van Saun said: "I think these concerns are a bit overdone." He noted that current rate levels are "actually not enough" to pressure the bank's borrowers or hamper its trading business. Still, he acknowledged that "there remains a lot of uncertainty" about how much further rates could climb.
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