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Big bank stocks dip on fear of low interest rates

The Associated Press

Many bank stocks slipped Monday as traders bet that low interest rates and slow loan growth will weaken the companies' profits this year.

Big U.S. banks are set to begin announcing their first-quarter earnings later this week. Analysts say the banks may revise their profit expectations downward because of low interest rates, which make it harder to profit from lending; and a reduction in fee income from refinancing mortgages.

Financial companies have weighed on the broader market in the past three weeks, after outperforming other categories for most of the first quarter. The KBW Bank Index declined 3.5 percent between March 20 and Friday's close. The Standard & Poor's 500 index lost just a fraction of a percentage point during that period.

Investors fear that banks' earnings will suffer from low interest rates, analysts with Keefe, Bruyette & Woods said in a research note published Sunday. Low interest rates limit banks' ability to profit from lending.

Financial stocks tend to track the yield on the 10-year Treasury note, KBW managing director Christopher Mutascio said in an interview. Mutascio covers big banks for KBW, but was not one of the writers of Sunday's research note.

Mutascio said the yield on the 10-year note has little real impact on banks' interest income because today's loans are tied mainly to short-term benchmarks like the Fed Funds Rate. That's the rate charged by the Fed and banks for overnight loans.

Still, he said, traders buy and sell bank stocks based on the 10-year Treasury yield, which also has been sliding. The yield fell below 1.70 percent Friday, down from a recent high of 2.06 percent set on March 11.

Yields fell as traders sold riskier investments and bought Treasurys. Demand for Treasurys tends to increase when the financial system is threatened by events like the financial crisis in Cyprus. A bond's yield falls as demand for it increases.

Bank stocks are vulnerable in part because the yield on the 10-year note rose strongly earlier this year, Mutascio said. The KBW Bank Index rose 11.5 percent between the start of 2013 and its high reached on March 15.

"The rally this year in the first two and a half months was based on the 10-year Treasury yield going up, but that didn't have any impact on bank earnings," Mutascio said.

Still, he said, banks may suffer from the very low short-term rates set by the Federal Reserve in an effort to boost the economic recovery.

The extent of their pain will be apparent later this week as banks begin to announce their second-quarter financial results. Wells Fargo and JPMorgan Chase will report before trading begins on Friday.

Traders also will be watching banks' other main source of revenue, the fees they collect for mortgage lending and other services. Mortgage lending has been extremely profitable for several quarters as homeowners refinance their home loans to take advantage of low borrowing rates. As that wave of refinancing subsides, banks are generating less fee revenue from mortgage origination.

Some, like Wells Fargo, are balancing that risk by servicing large numbers of mortgages. Loan servicers collect monthly payments from borrowers and manage delinquencies and foreclosures. Servicing generates a steady stream of fee income over a longer period of time.

Recent data from banks and the Federal Reserve confirm that loans are growing at a slower rate, analysts with Susquehanna Financial Group said in a research note published Monday. That may cause banks to slash their earnings expectations for the year as they announce their first-quarter results, the analysts said.

The S&P 500 was off about a point, or 0.1 percent, at 1,552 shortly before 1 p.m. Eastern time. Big banks' stocks fell more sharply:

— Goldman Sachs shaved $1.60, or 1.1 percent, to $142.10.

— Wells Fargo lost 44 cents, or 1.2 percent, to $36.70.

— Morgan Stanley dropped 21 cents, or 1 percent, to $21.35.

— Citigroup fell 6 cents, or 0.2 percent, to $42.95.

— Bank of America declined 2 cents, or 0.2 percent, at $11.95.

Regional banks fared better:

— SunTrust Banks Inc. rose 19 cents, or 0.7 percent, to $28.23.

— BB&T Corp. rose 10 cents, or 0.3 percent, to $30.20.

— PNC Financial Services rose 9 cents or 0.1 percent, to $65.33.