With the Federal Reserve's first interest rate cut since March 2020 in focus, investors are on the edge. This was further compounded by a significant cooling down of the job market, sparking recession fears. Hence, the market participants are now expecting a sizable rate cut at the two-day FOMC meeting on Sept.17-18.
As the broader market witnessed sustained weakness, bank stocks were not untouched. The KBW Nasdaq Bank Index and the S&P 500 banks industry group index fell more than 5.5%. The three worst-performing S&P 500 banks – KeyCorp (NYSE: KEY), Wells Fargo (NYSE: WFC) and U.S. Bancorp (NYSE: USB) – recorded a steeper fall than the index and the industry they belong to. These banks currently carry a Zacks Rank of 3 (Hold).
One-Week Price Performance
Image Source: Zacks Investment Research
Traditionally, banks perform well in a rising rate environment, but this time it's different. Aggressive interest rate hikes by the central bank in the past four decades have weakened banks' financial performance due to sluggish loan demand, rising funding/deposit costs and deteriorating asset quality.
In response, banks are diversifying revenue streams toward fee income sources, curtailing risky loan portfolios and restructuring balance sheets to maintain profitability. These efforts, combined with potential rate cuts, are expected to support banks' profitability this year and beyond.
3 S&P 500 Banks With Steep Weekly Dip to Watch
KeyCorp: This Cleveland, OH-based lender has a presence across 15 states through a network of almost 1,000 branches and 1,200 automated teller machines (ATMs).
On Aug. 12, KeyCorp announced a minority equity investment of $2.8 billion (in aggregate) by The Bank of Nova Scotia (NYSE: BNS) in two tranches. The first phase was completed on Aug. 30, and now BNS holds a 4.9% equity stake in KEY.
The second part involves BNS making an additional $2 billion of investment, expected ...
