Why Bank Stocks Are Getting Crushed Since Ukraine Conflict Began

The bond market is pricing in a 68.1% chance the Federal Reserve will raise interest rates at least 1.5% by the end of 2022. Rising interest rates are typically good news for bank profits, but bank stocks have taken a huge hit so far in 2022.

Why Interest Rates Matter: Higher interest rates generally help boost banks' net interest margins, the difference between the interest they pay on deposits and the interest they charge for loans. However, banks also need a healthy economy and a pool of credit-worthy borrowers to generate loan growth.

Related Link: How Does The Inflation And Oil Shock Of 2022 Compare To The Late 1970s?

In the past month, the SPDR S&P Bank ETF KBE is down 9.3%, and several of the most popular big bank stocks have performed even worse. JPMorgan Chase & Co JPM shares are down 10.1%, Wells Fargo & Co WFC shares are down 12.2% and Bank of America Corp BAC shares are down 13.3%.

Uncertainty Rising: On Tuesday, Bank of America analyst Ebrahim Poonawala said bank stocks have significantly underperformed the broader market since Russia invaded Ukraine.

The good news for bank stock investors is that the market's expectations for rate hikes haven't meaningfully changed from a month ago. The bad news is there is now significantly higher near-term U.S. economic uncertainty.

"While a re-opening of the U.S./global economies are positives, investors now need to grapple with the potential for hyperinflation on the back of a spike in oil and food prices and what these mean for customer sentiment," Poonawala said.

Poonawala said an oil shock that sends oil prices to $200 per barrel could potentially reduce U.S. GDP growth by 2%. In addition, he noted that during the six instances since 1970 during which both reported and core CPI inflation exceeded 4%, bank stocks underperformed the S&P 500 by an average of 12%.

Benzinga's Take: Rising interest rates are good news for bank stocks, but only during periods in which the underlying economy is also healthy. Modest inflation and elevated interest rates can be an excellent environment for banks, but hyperinflation forcing a spike in interest rates that chokes off economic growth would clearly be a negative catalyst for bank stocks.

Photo: Pasja1000 from Pixabay