The Fed may not be able to save financial stocks

One of the biggest problems for bank stocks last year may have turned into one of this year's smallest.

As banks have struggled to cut costs and add new sources of income to combat lower rates on lending, investors have kept close watch on the Fed for clues to when officials will raise rates. But even with one rate hike in December and the prospect of more hikes this year, traders say higher rates may not be enough to save financial stocks from their slide.

"Even in the current environment, which is not bad, they're not really creating value for shareholders," Nick Colas of Convergex said Thursday on CNBC's "Power Lunch."

According to Colas, the bigger problem for financial companies is that their profitability has already taken a huge hit. Colas said financials are returning 6 to 7 percent on capital, falling short of the 8 percent minimum that investors expect. For now, it seems that some investors are giving up, he said.

"That really limits the amount of interest that investors and shareholders have," Colas said. "On our desk, we're not seeing much interest in financials in the last couple of weeks, partly because they've just underperformed so badly, and who wants to own them going into the [new] quarter?"

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The S&P 500 financial sector is the second-worst performing sector of 2016, having fallen more than 6 percent since the start of the year. If the Fed does decide to raise interest rates more than once this year, Boris Schlossberg of BK Asset Management said that may redeem bank stocks, at least in the near term.

"If rates do go up 50 basis points, its going to wash away a lot of sins," he said Thursday in a "Trading Nation" segment.

But in the long run, Schlossberg said banks are also getting attacked from a technology side, facing increased competition from new financial technology companies and solutions.

"Banks are just too inefficient at this point," he said. "The whole industry may be going through a very wrenching period of adjustment."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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