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Bank Stocks Hit 52-Week Low: Should Investors Stay Away?

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The major U.S. indexes —the S&P 500, Nasdaq and the Dow Jones —declined more than 3% yesterday. Also, the U.S. bank stocks, big and small, had one of their worst days since June 2016.

The SPDR S&P Regional Banking ETF (KRE - Free Report) lost 5.5% and SPDR S&P Bank ETF (KBE - Free Report) fell 5.3%. Among the big banks, Bank of America (BAC - Free Report) declined 5.4%while JPMorgan, Citigroup (C - Free Report) and Wells Fargo fell4.5% each. Further, regional banking stocks including SunTrust, Regional Financial (RF - Free Report) , Capital One (COF - Free Report) and Citizens Financial Group (CFG - Free Report) lost more than 5%.

What Caused the Decline?

Yield curve inversion early this week along with the concerns related to expectations of slowdown in economic activities and the U.S.-China trade war worries led to bearish investor sentiments.

An inversion of yield curve means short-term interest rates are higher than the long-term ones. Many see this as an early indication of an impending recession. For the first time in more than a decade, yield curves inverted on Monday. The yield on the 5-year Treasury note dipped below the yield on the 3-year note.

Notably, analysts predict that an inversion of the 2-and 10-year notes, which most investors watch for, is in the cards.

For banks, which benefit from steepening of yield curve, this is a bad news. Banks earn interest income by charging borrowers higher long-term interest rates while doling out smaller interest rates to depositors. This results in improvement in net interest margin (NIM).

At present, the short-term yields affected by the Federal Reserve’s policy have mostly been stable. On the other hand, the long-term rates have declined significantly mainly due to expectations of slowdown in the economy and inflation worries.

Thus, growth in banks’ net interest income is expected to get hampered over time. This could lead to decline in NIM as well.

Further, the inversion might result in a halt in the Fed’s interest rate hikes. The central bank has already increased rates thrice year, with one more expected later this month.

For 2019, three more hikes are expected, but this may not occur given the current situation. Therefore, profitability of banks, which are one of the biggest beneficiaries of the interest rate increases, is anticipated to get hurt.

Additionally, as the financial health of the nation has direct relation with the banks’ profitability, assumptions of economic slowdown resulted in pessimistic stance. Nonetheless, at present, banksare performing well financially, driven by several restructuring and streamlining measures.

A Right Time to Buy Bank Stocks?

One might be thinking that staying away from the bank stocks is a right thing to do now. But with majority of the stocks hitting a 52-week low, this seems to be a right time to add a few bank stocks as they are relatively cheaper.

Also, banks’ strong financial performance is likely to continue given the strong fundamentals, impact of higher interest rates, loan growth and lower tax rates.

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