Bank Stocks Tumble as Markets React to Fed Rate Decision

Bank stocks are lower on Thursday following the Fed's pessimistic outlook.
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Bank stocks were battered Thursday as investors reacted to the Federal Reserve's decision to leave interest rates unchanged because of concern about the coronavirus outbreak's continued grip on the economy.

The Fed also projected interest rates would remain near zero through 2022 and said it would keep buying bonds and do what it takes to prop up the economy.

The stock market was falling on the central bank's pessimistic outlook and Treasury yields were also sliding Thursday.

“Despite some early signs of economic improvement, the Fed reinforced that it will remain supportive until uncertainty lifts and the economy is in a stable, sustained recovery, and that may mean no rate hikes until 2023,” said LPL Financial Senior Market Strategist Ryan Detrick.

The Invesco KBW Bank ETF  (KBWB) - Get Report, which tracks the KBW Bank Index, was falling 9.1% to $24.77.

Banks like Wells Fargo & Co.  (WFC) - Get Report, Bank of America  (BAC) - Get Report, JPMorgan Chase  (JPM) - Get Report, and Citigroup  (C) - Get Report were all tumbling.

JPMorgan analyst Vivek Juneja said in a note to investors that Wells Fargo's dividend is very likely to be cut as the bank now expects 2020 net interest income to drop 11% to 13% year-over-year.

The combination of "sharply lower" short-term and long-term rates plus asset cap bodes for a lower run rate of earnings before provisions, Juneja said.

Wells Fargo has "by far" the lowest reserves-to-loans ratio, which will pressure 2020 earnings as it builds reserves.

Morgan Stanley's Betsy Graseck lowered her price target on Wells Fargo to $27 from $29, while affirming an equal-weight rating on the shares after the bank presented at the firm's annual financial conference. 

In recapping the conference, Graseck said she expected most banks to be able to maintain dividends. She said card issuers were seeing better spending after lows in March and April, and loan growth looks weaker in the second quarter, while more banks expect higher reserve builds in the second quarter.

Piper’s R. Scott Siefers cut earnings for large regional banks, including PNC Financial  (PNC) - Get Report, Citizens Financial Group  (CFG) - Get Report and KeyCorp  (KEY) - Get Report. He expects thinner second-quarter net interest margins amid “extraordinary” deposit growth, and higher-than-previously-expected second-quarter credit costs.

Meanwhile, Citi analyst Arren Cyganovich raised his price target on Ally Financial  (ALLY) - Get Report to $27 from $24 and affirmed a buy rating on the shares. 

After a virtual conference presentation by Chief Financial Officer Jenn LaClair,  Cyganovich said he felt better about the company's credit provisioning and retail auto originations. But he added that that dealer floor-plan receivables are down sharply. 

All told, the analyst said he sees an improved outlook for Ally Financial.