Markets

Bank stocks dive after the Fed slashes rates to curb coronavirus impact, JPMorgan off by nearly 4%

Key Points
  • Shares of JPMorgan and Bank of America dropped 3.7% and 5.5%, respectively, while Citigroup and Morgan Stanley fell 3%%.
  • The declines accelerated after the Fed slashed interest rates by half a percentage point on Tuesday in between its policy meetings.
  • Bank margins could take a hit if they are paying out deposit rates at a higher level than market rates.
People inside the offices of JP Morgan Chase in New York City.
Getty Images

Bank stocks sold off in unison on Tuesday following the Federal Reserve's emergency rate cut to combat an economic slowdown triggered by the fast-spreading coronavirus. The weakness by the group kept the overall markets' gains in check.

Shares of JPMorgan and Bank of America dropped 3.7% and 5.5%, respectively, while Citigroup and Morgan Stanley fell more than 3%. The declines accelerated after the Fed slashed interest rates by half a percentage point on Tuesday in between its policy meetings, the first such cut since the financial crisis.

Bank margins could take a hit if they are paying out deposit rates at a higher level than market rates. Their earnings are also hurt when the spread between short-term and long-term rates flattens, a phenomenon that could worsen if the Fed cuts.

The shares have been under pressure lately as the 10-year Treasury yield declined to a record low amid a broad stock market sell-off. The group failed to bounce on Tuesday as the rest of the market rebounded. 

"No large bank short term is immune to the negative impact of lower interest rates on spread revenues," Mike Mayo, Wells Fargo's bank analyst, said in a note on Monday.

The SPDR S&P Bank ETF tumbled more than 13% in 2020 alone as the yield on the 10-year Treasury note plummeted 40 basis points.

Investors have fled stocks and rushed into bonds, scrambling for safety, as the epidemic stoked fears of a global economic slowdown or even a recession.

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