S&P 500   5,096.27
DOW   38,996.39
QQQ   439.00
Pure Storage, Hormel Foods rise; WW International, First Advantage fall, Thursday, 2/29/2024
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How major US stock indexes fared Thursday, 2/29/2024
Average long-term US mortgage rises to 6.94% after marking fourth-straight weekly increase
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
Grads From This Midwestern School Are More Likely to Start a Billion Dollar Company Than Founders Who Went To Stanford, Harvard, or MIT: Study
It's Leap Day, and You're Probably Working — Here's How 'February 29' Affects Your Paycheck
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
China's manufacturing activity contracts for 5th straight month despite policy support
Stock market today: World stocks track Wall Street gains, Japan shares hit record high
S&P 500   5,096.27
DOW   38,996.39
QQQ   439.00
Pure Storage, Hormel Foods rise; WW International, First Advantage fall, Thursday, 2/29/2024
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
How major US stock indexes fared Thursday, 2/29/2024
Average long-term US mortgage rises to 6.94% after marking fourth-straight weekly increase
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
Grads From This Midwestern School Are More Likely to Start a Billion Dollar Company Than Founders Who Went To Stanford, Harvard, or MIT: Study
It's Leap Day, and You're Probably Working — Here's How 'February 29' Affects Your Paycheck
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
China's manufacturing activity contracts for 5th straight month despite policy support
Stock market today: World stocks track Wall Street gains, Japan shares hit record high
S&P 500   5,096.27
DOW   38,996.39
QQQ   439.00
Pure Storage, Hormel Foods rise; WW International, First Advantage fall, Thursday, 2/29/2024
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
How major US stock indexes fared Thursday, 2/29/2024
Average long-term US mortgage rises to 6.94% after marking fourth-straight weekly increase
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
Grads From This Midwestern School Are More Likely to Start a Billion Dollar Company Than Founders Who Went To Stanford, Harvard, or MIT: Study
It's Leap Day, and You're Probably Working — Here's How 'February 29' Affects Your Paycheck
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
China's manufacturing activity contracts for 5th straight month despite policy support
Stock market today: World stocks track Wall Street gains, Japan shares hit record high
S&P 500   5,096.27
DOW   38,996.39
QQQ   439.00
Pure Storage, Hormel Foods rise; WW International, First Advantage fall, Thursday, 2/29/2024
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
How major US stock indexes fared Thursday, 2/29/2024
Average long-term US mortgage rises to 6.94% after marking fourth-straight weekly increase
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
Grads From This Midwestern School Are More Likely to Start a Billion Dollar Company Than Founders Who Went To Stanford, Harvard, or MIT: Study
It's Leap Day, and You're Probably Working — Here's How 'February 29' Affects Your Paycheck
Americans Now Favor Gold Over Stocks as an Investment Vehicle (Ad)
China's manufacturing activity contracts for 5th straight month despite policy support
Stock market today: World stocks track Wall Street gains, Japan shares hit record high

Challenges Loom for Regional Banks as Interest Rates Surge

bank stocks

Key Points

  • Upcoming earnings reports from big banks like JPMorgan, Wells Fargo, and Citigroup will provide insights into borrowing trends as rates rise.
  • Regional banks rallied in June and July but their trend reversed lower in August as investors grew more concerned.
  • Regional banks' challenges include unrealized losses, deposit outflows and lower profits. 
  • 5 stocks we like better than Bank of America

As the big banks begin reporting earnings, will investors get some insights into whether higher interest rates will mean pressure on profits.

First up are JPMorgan Chase & Co. NYSE: JPM, Wells Fargo Co. NYSE: WFC and Citigroup Inc. NYSE: C.  Those reports will likely offer hints as to whether the bigger financial institutions are seeing consumers and businesses pulling back from borrowing and spending. 

Next week, reports from Bank of America NYSE: BAC, Goldman Sachs Group Inc. NYSE: GS and Morgan Stanley NYSE: MS will shed more light on those behaviors, and whether the sector is in for a slump.

So far, despite rising inflation, consumer spending has remained robust.

For example, Delta Air Lines Inc. NYSE: DAL said on October 12 that it continues to see worldwide strength in bookings, adding that travel is still a  "top purchase priority" for its customers. It boosted its revenue forecast.

Rising interest rates could threaten numerous industries, including financial services.


Inflation Making a Comeback

The prospect of inflation remaining high has resumed. The consumer-price index increased by 3.7% year-over-year in September, after analysts and investors had believed inflation was cooling off. 

The Financial Select Sector SPDR Fund NYSEARCA: XLF is down 4.47% in the past month, underperforming the S&P 500, which is down 2.52% in that time. 

The largest banking component in the finance sector is JPMorgan Chase, which is down 0.36% in the past month. That’s not what’s leading the sector lower. 

However, big bank stocks may not be at the same level of risk as the regionals. 

The SPDR S&P Regional Banking ETF NYSEARCA: KRE rallied in June and July after being smacked around as a result of the crisis at Silicon Valley Bank in March. However, that rally attempt rolled over in August. 

The ETF tracks the S&P Regional Banks Select Industry Index, which measures performance of the U.S. regional banking sector.

In the past month, the ETF is down 4.69%. Year-to-date, it’s posted a decline of 27.92%. 

Rising Rates Hurting Regional Banks

The ETF’s underlying index includes companies operating regional banks and thrifts. 

In banking terms, a thrift refers to a financial institution that primarily specializes in savings and mortgage lending activities. 

Thrift institutions are often associated with providing financial services to individuals and households, rather than businesses. They offer savings accounts, certificates of deposit, and mortgage loans. The term "thrift" is sometimes used interchangeably with "savings and loan association" or "savings bank." 

Thrifts are known for their focus on promoting savings and homeownership, often emphasizing the mortgage side of their businesses.

Higher Rates Hurting Mortgage Business

With rates being significantly higher, fewer mortgages are being originated. That’s a concern among investors who believe regional banks may be in for some rough times.

The KRE ETF could be a canary in the coal mine, when it comes to the impact of interest rates on regional banks. 

The ETF’s largest components and their one-month returns are:

Those performance numbers show you how dire the overall regional banking industry appears to be right now. 

In fact, some regional banks are at risk of being booted from the S&P 500 due to low market capitalization. Zions Bank and Comerica Inc. NYSE: CMA, with market caps of $5.214 billion and $5.495 billion, respectively, are among the smallest in the S&P 500. 

Regional banks are currently facing numerous challenges, including unrealized losses on long-dated securities, which was part of the problem that brought down Silicon Valley Bank. Others include outflows of deposits to larger banks, lower profits due to higher funding costs as interest rates rise, potentially weakened loan portfolios, and new debt level requirements.

Don’t be surprised if earnings reports from the larger U.S. banks influence what happens with stocks of regional banks, which are at potentially greater risk.

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Should you invest $1,000 in Bank of America right now?

Before you consider Bank of America, you'll want to hear this.

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Bank of America (BAC)
4.6031 of 5 stars
$34.52+1.3%2.78%11.24Moderate Buy$35.53
Citigroup (C)
4.696 of 5 stars
$55.47+0.8%3.82%13.90Moderate Buy$57.03
Comerica (CMA)
4.935 of 5 stars
$49.37+1.8%5.75%7.67Hold$56.02
Delta Air Lines (DAL)
4.942 of 5 stars
$42.26+0.6%0.95%5.91Buy$55.54
Financial Select Sector SPDR Fund (XLF)N/A$40.340.0%1.74%12.16N/AN/A
JPMorgan Chase & Co. (JPM)
4.2172 of 5 stars
$185.89+0.8%2.26%11.46Moderate Buy$179.11
Morgan Stanley (MS)
4.7801 of 5 stars
$86.040.0%3.95%16.64Hold$94.56
Regions Financial (RF)
4.6059 of 5 stars
$18.61+1.5%5.16%8.90Hold$20.12
The Goldman Sachs Group (GS)
4.705 of 5 stars
$388.79-1.1%2.83%17.04Moderate Buy$409.93
Wells Fargo & Company (WFC)
4.4902 of 5 stars
$55.52+1.5%2.52%11.52Moderate Buy$51.43
Zions Bancorporation, National Association (ZION)
4.3426 of 5 stars
$39.43+3.5%4.16%9.06Hold$40.79
SPDR S&P Regional Banking ETF (KRE)N/A$48.14+1.4%3.05%10.19N/AN/A
Truist Financial (TFC)
4.4663 of 5 stars
$34.93+0.3%5.95%-32.34Moderate Buy$39.87
M&T Bank (MTB)
4.9226 of 5 stars
$139.54+1.0%3.73%8.84Moderate Buy$149.71
Compare These Stocks  Add These Stocks to My Watchlist 

Kate Stalter

About Kate Stalter

  • stalterkate@gmail.com

Contributing Author

Retirement, Asset Allocation, and Tax Strategies

Experience

Kate Stalter has been a contributing writer for MarketBeat since 2021.

Additional Experience

Series 65-licensed investment advisor, financial advisor, Blue Marlin Advisors; investment columnist for Forbes, U.S. News & World Report

Areas of Expertise

Asset allocation, technical and fundamental analysis, retirement strategies, income generation, risk management, sector and industry analysis

Education

Bachelor of Arts, Saint Mary’s College, Notre Dame, Indiana; Master of Business Adminstration, Kellogg School of Management at Northwestern University

Past Experience

Founder, financial advisor for Better Money Decisions; editor, stock trading instructor for Investor’s Business Daily; columnist, podcast host, video host for MoneyShow.com; contributor for Morningstar magazine


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