Bank Stock Roundup: Coronavirus, 'Emergency' Fed Rate Cut & Wells Fargo Dominate
Zacks Investment Research | Mar 05, 2020 08:59PM ET
Coronavirus continued to wreak havoc on investor sentiments over the past five trading days. All the major indexes – the S&P 500, Dow Jones and Nasdaq – witnessed a roller coaster ride, swinging from new highs to record lows. Bank stocks did not remain untouched.
In a major and unexpected development, the Federal Reserve cut interest rates by half a percentage point. Now, the benchmark interest rate is in the range of 1% to 1.25%. This ‘emergency’ step spooked the markets, with investors seeing this as an indication that the U.S. economy is likely to be more adversely impacted than previously expected.
Banks, one of the biggest beneficiaries of higher rates, will be adversely impacted by this move. Net interest income and margins are now likely to decline more than previously expected,given the lower interest rates and coronavirus-related disruptions in supply chains and sales generation in several industries, whichwill lead to lower business activities and less demand for loans.
On the other hand, lower rates will lead to a rise in refinancing activities in the mortgage business. This, along with a slight rise in origination volume driven by lower mortgage rates, will support banks’ mortgage banking income. Also, increased volatility seems have resulted in a rise in equity and bond trading activities.
In other developments, the Fed has approved the simplified capital rules for large banks effective 2020 stress test, keeping intact the strong capital requirements. Under the new framework, capital requirements for the largest and most complex banks would increase, while less complex banks will face lower capital requirements.
Now coming to the company-specific headlines, banks continued with their restructuring and streamlining initiatives. These efforts are anticipated to attract more business and fuel revenue growth. Also, with advancement in technology, increase in digital offerings by major banks remains in focus.
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