Banks face a potential double whammy: While a recession could hurt loan growth and increase credit losses, higher rates threaten to shrink profit margins if the interest that lenders pay out on deposits eats away at interest earned from loans.
“Bank stocks do not do well in a recession, and more and more investors are worried about a hard landing,” said Matt Maley, chief market strategist at Miller Tabak. “The recent performance of banks is evidence to me that there is increased concern around the economic outlook for 2023,” said Walter Todd, chief investment officer of Greenwood Capital. Expectations of a slowdown led Todd’s firm to sell some of its bank shares earlier this year.
RBC Capital Markets analyst Gerard Cassidy said part of the recent weakness in bank stocks reflects expectations that net interest margins will peak next year and concerns that “we are going to see increases in the provision for credit losses due to the expectation of a slowingThe extent of such pressure will become clearer next month when banks report fourth-quarter earnings.