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Bank Stocks Fall as Jobs Report Threatens 2015 Rate Hike

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Bank stocks declined as the U.S. jobs report fell short of forecasts and bond traders pushed back expectations for a Federal Reserve rate hike until next year.

Nine of the 10 largest U.S. lenders dropped at least 1.2 percent at 1:41 p.m. in New York, led by Bank of America Corp.’s 2.9 percent decline. The Standard & Poor’s 500 Financials Index, the worst-performing industry in the broader S&P 500, fell as much as 3.1 percent to the lowest level since May 2014.

Higher interest rates will allow banks to earn larger spreads on the deposits they’ve collected. While the Fed’s efforts to reduce rates stabilized asset prices and helped lenders access cheap debt in the wake of the credit crisis, prolonged low rates have crimped banks’ margins. Traders now assign a 55 percent chance for an increase by the central bank’s March meeting.

“The payroll trend is not December’s friend,” Bloomberg Intelligence analysts led by Carl Riccadonna wrote after the Labor Department said the U.S. gained 142,000 jobs last month, less than the 201,000 median forecast in a Bloomberg survey of economists.

Bank of America, which has said it would benefit from higher rates, dropped as much as 5.9 percent. Morgan Stanley, which is down 21 percent this year, fell 2.3 percent to $30.76, which would be the lowest closing price since May 2014.

Earnings Estimates

JPMorgan Chase & Co. kicks off third-quarter earnings for the industry on Oct. 13, followed by Bank of America and Wells Fargo & Co. on Oct. 14.

Bank analysts have cut profit estimates as prospects for a rate hike dimmed. KBW Inc. analysts on Thursday reduced average earnings-per-share estimates for the largest banks by 3 percent in 2016 and 4 percent in 2017.

“A slowing economy in China, generally weak growth globally and the possibility of a government shutdown likely mean that the Fed will not raise rates until December 2015,” the KBW analysts wrote. “Should the Fed not raise rates at all, then we believe that there still could be downside to our EPS estimates.”

Compression of banks’ net interest margins, the difference between what banks pay for deposits and charge for loans, will hold back earnings longer than originally estimated, S&P analysts wrote Friday in a report. While lenders will have to continue to keep costs low, core profitability should be unchanged to slightly higher in 2015, the analysts wrote.