The plunge in long-term interest rates to record lows will likely pinch bank profits in the coming months, banking analysts say.
With the 10-year Treasury yield hitting historic lows last week, bank-stock analysts are reconsidering their profit forecasts.
FBR Capital Markets' analysts cut their ratings for seven regional banks on Monday, including Zions Bancorporation and Huntington Bancshares Inc. They also lowered their earnings estimates for Bank of America Corp., JPMorgan Chase & Co. and a host of other banks.
Deutsche Bank downgraded Regions Financial Corp. to "hold" from "buy" on Friday. Analysts there said Bank of America and SunTrust Banks Inc. were especially vulnerable to a hit from lower rates.
Financial stocks fell even as the overall market ended the day flat Monday. Among the hardest hit were JPMorgan Chase and Bank of America. JPMorgan's shares dropped 3 percent, to an even $31. Bank of America shares sank 2 percent to $6.90.
Among the smaller banks, Huntington Bancshares lost 4 percent to $5.84; Zions stock fell 3 percent to $17.61; and Regions Financial dropped 6 percent, to $5.55.
The main reason for banking analysts' shift in outlook is the expectation that the drop in Treasury yields will shrink what's known as the "net interest margin," the difference between what banks pay out and what they receive.
Because borrowing rates are anchored to U.S. Treasury yields, banks are likely to see a drop in revenue from making new loans and buying bonds. At the same time, banks have little room left to reduce the low yields they pay on savings accounts.
The same worries about the global economy that are driving Treasury yields lower will likely dampen banks' revenue growth, Deutsche Bank analysts said.
A dismal U.S. employment report rattled financial markets Friday, sending traders into the Treasury market. The push into Treasurys has driven the benchmark 10-year Treasury note to as low as 1.44 percent.
Higher demand for bonds lowers their yields. That, in turn, pushes down the cost of borrowing for the federal government and also for people hoping to take out loans for homes or another big purchase.
FBR analysts see one side benefit for banks. Mortgage-loan origination should stay strong, they write, "and should drive another few quarters of strong mortgage-banking revenue." Those banks that make and service mortgages will fare better than others, they say. They recommend PHH Corp., Wells Fargo & Co., PNC Financial Services Group Inc. and Fifth Third Bancorp.