After outperforming earlier this year, bank stocks are leading the decline of the stock market as the U.S.-China trade war drags on. Bank stocks as a group are down 8.2% thus far in May, with Wells Fargo & Co. (WFC) down 6.5%, JPMorgan Chase & Co. (JPM) down 6.8% and Bank of America Corp. (BAC) plunging 10.3%.
But the trade conflict is just one of many headwinds affecting the industry. Five negative forces are likely to cause further declines in the biggest banks and bank stocks as a group, as outlined in several Wall Street Journal reports. These headwinds include rising credit card net charge-offs, falling stock-trading volumes in the second quarter, and lower volumes in the U.S. debt capital markets. This has coincided with a sharp drop in Treasury yields, which can weigh on banks’ lending margins, as well as general concerns about the slowing economy.
5 Headwinds Facing Banks
- Mounting credit card losses
- Falling stock-trading volumes
- Decline in U.S. debt capital markets volumes
- Lower Treasury yields
- Worries about the slowing economy
Source: The Wall Street Journal
According to research by Trade Partnership Worldwide, a full-blown trade war would result in a $767 loss per four-person family in the U.S. annually, as cited in an earlier Investopedia report. Lower disposable incomes could mean less spending, a drop in consumer loan volume and more soured loans. “At the end of the day, banks are a reflection of the economy. When you have headlines that have the potential to adversely impact GDP growth, like China trade, that bothers us more than anything,” said Jason Goldberg, a senior banking analyst at Barclays.
Meanwhile, the 10-year Treasury fell to its lowest level since September 2017 this week, leading to a dip in net interest margins. The increase in market volatility hasn’t done much for trading revenues either, with volumes dropping by about 10% from the first quarter, per Dow Jones Market Data Group.
At the moment, U.S. consumers appear to be in relatively good shape, which is good news for the economy and banks. But many investors will be watching closely at whether banks' net charge-offs for credit-card debt continues to rise. The charge-offs saw the largest dollar increase compared to other loan categories in the first quarter, per the WSJ, which notes that credit-card delinquencies are also emerging as an issue for older borrowers. If these data points worsen in the coming months, it could mean more bad times are ahead for banks.