Banks pummeled as rates dive, but analysts say these stocks are already 'priced for a recession'

But Mike Mayo, head of U.S. large-cap bank research at Wells Fargo Securities, told clients this week that bank stocks already have the potential for trouble baked in.

As recession fears ratchet up, the chances that the Federal Reserve will cut interest rates again do, too. And as the Fed Funds rate goes lower, the difference between what banks earn by making loans at higher interest rates than what they pay depositors — known as net interest income — tightens. Financials were the worst-performing sector on Wednesday. Banks led the sector lower, with the Keefe Bruyette & Woods Nasdaq Bank Index, or KBW, down 5% week to date, on pace for its worst week since March. Bank of America shares are down 8% this week. Regional banks took an even bigger hit, and were down more than 9% month to date, on pace for the first negative month since May. KeyCorp is down 13% month to date, while BB&T and SunTrust have both fallen more than 10%.

In some cases, perception can be worse than reality for banks. Mosby pointed to similar bank sell-offs after an energy debacle and Brexit in 2016.

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