Bank stocks outpace broad market into the red as higher bond yields impact the value of their portfolios

By Steve Gelsi

Two analysts tell MarketWatch that the sudden spike in bond yields translate to an increase in unrealized losses for banks

A spike in bond yields on Tuesday threatened to pose yet another headache for down-beaten bank stocks, which moved into the red more deeply than the broader market.

"The rise in rates isn't good," said Tim Coffey, a bank analyst at Janney Montgomery Scott who covers regional banks.

The longest-dated yield in the roughly $25 trillion Treasury market moved up abruptly toward 5% on Tuesday, which puts it on track to join its 10-year counterpart at the highest levels since the period before the 2007-2009 recession.

The Financial Select Sector SPDR XLF was down 1.9% on Tuesday, greater than the 1.6% drop by the S&P 500 SPX . The financial sector was the third-worst performer among 11 subsectors in the index, including a 4.6% drop from Charles Schwab Corp. (SCHW), and 4% slides from Synchrony Financial (SYF), Goldman Sachs Group Inc. and T. Rose Price Group. (TROW).

The XLF has lost 5.5% of its value in 2023, compared to a 10% gain by the S&P 500.

Among other indexes in Tuesday trading, the KBW Nasdaq Index BKX was down 2.1% and the SPDR S&P Regional Banking ETF KRE fell 2.1%.

When bond yields rise, their prices fall, which negatively impacts the fair value of bank bond portfolios against the carrying value of what they paid for them, Coffey said.

The higher yields also increase the unrealized losses on the bank's loan portfolio, while growing pressure on deposit costs and present a headwind on net interest income.

On the plus side, Coffey said some have worried that banks will lose deposits as rates climb, but so far that has not been the case, he said.

Coffey's favorite bank names include Axos Financial (AX), Western Alliance Bancorp (WAL) and East West Bancorp (EWBC).

Richard Bove, analyst at Odeon Capital, said the increase in bond yields has "intensified" the problems faced by the banking sector.

"They lower the value of bank assets -- this lowers the value of their equity, " Bove said in an email to MarketWatch. "It intensifies the need of the Treasury to get more equity into the banks. Plus, it causes more difficulty in allowing the banks to increase the rates on their deposits."

Bank stocks mostly fell during the third quarter of 2023 that came to a close on Friday, although Citi analyst Keith Horowitz said bank stocks offer an "attractive entry point" ahead of further losses in the sector.

Also read: Bank stocks end Q3 with mixed results as Citi analyst hits buy button on 'attractive entry point' for sector

-Steve Gelsi

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10-03-23 1545ET

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