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Banks Crash as Spiraling Coronavirus Fears Spook Investors

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The financial sector crashed yesterday with the massive sell-off in the market following the Federal Reserve’s announcement of emergency measures and buyback suspensions by major banks. Heightening concerns over the sector’s earnings outlook are sending jitters across the market.

Notably, the SPDR Financial Select Sector exchange-traded fund (XLF - Free Report) plummeted 13.70%, and all three indices — the S&P 500, Dow Jones and Nasdaq — nosedived, closing in red.

Curtailment of businesses and consumer activities in an effort to paralyse the spread of COVID-19 has sparked fears of another recession in the United States and worldwide. Therefore, softer demand and credit metrics on loans have triggered a negative view for the financial sector.

Additionally, the latest emergency rate cut might strain banks’ margins, while suspension of buybacks is likely to impact their earnings per share, which has spooked investors. Nevertheless, lower deposit rates are anticipated to provide respite to some extent.

 

Background

The coronavirus pandemic has become a serious threat to the global economy. In an accelerated move, the central bank slashed interest rates to zero (for the first time since the 2008 financial crisis). Further, the Fed announced deployment of $700 billion to buy Treasury securities and agency mortgage-backed securities, in order to aid the "flow of credit to households and businesses" to combat the impact of the pandemic, and boost the economy and banks’ liquidity.

Moreover, given the turbulent situation unlikely to dissipate any time soon, Wall Street biggies have suspended multibillion-dollar share-buyback programs till second-quarter 2020. With this move, these financial firms are aimed at keeping scope of sufficient capital and liquidity in a bid to sail through the severe economic uncertainty.

Notably, following the Financial Services Forum (FSF), which represents Bank of America (BAC - Free Report) , Bank of New York Mellon (BK), Citigroup (C - Free Report) , Goldman Sachs (GS), JPMorgan (JPM), Morgan Stanley (MS), State Street (STT) and Wells Fargo (WFC), other major banks including Northern Trust Corporation (NTRS - Free Report) , PNC Financial (PNC - Free Report) , Comerica Incorporated (CMA - Free Report) , Fifth Third (FITB - Free Report) are among the other financial firms which have suspended buybacks for the moment.

Our Viewpoint

With the coronavirus crisis already hurting the economy, banks’ buyback-suspension move and the Fed’s second rate cut in less than two weeks’ time might be unfavorable for the financial firms’ earnings, which has further alarmed investors.

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