Magazine article American Banker

Investors Pummel Bank Stocks after Report of Inflation Jump

Magazine article American Banker

Investors Pummel Bank Stocks after Report of Inflation Jump

Article excerpt

Though many believe rising interest rates no longer hurt banks, rate jitters can still knock bank stocks for a loop.

That was the case Friday after a Labor Department report that consumer prices surged 0.7% in April, the biggest jump in nearly nine years.

Investors stampeded, sending the Standard & Poor's bank stock index down 3.15%, to 705.70, while the Dow Jones industrial average lost 1.75%, to 10,913.32.

The news indicated that inflation may be worse than thought. Though few believe the Federal Reserve will respond with a rate hike at this week's meeting, some said the higher prices will become a factor in the Fed's thinking later in the year.

"Today's announcement raises the possibility they will raise rates. Whether they will do it is hard to say," said Joel Houck, a senior analyst of specialty finance at A.G. Edwards & Sons Inc.

Bank profits on loans can be squeezed when rates rise. What's more, high rates can hurt the profitability of banks' customers, leading to credit quality problems.

But analysts credit banks for hedging against potential interest fluctuations-such as an rise in rates-with tools such as interest rate swaps and futures. And they note that banks have diversified into businesses that generate fees rather than interest income.

The relationship between "interest rates and stock prices is overblown," said Michael Mayo, an analyst at Credit Suisse First Boston. "But renewed interest rate jitters have the potential to hurt revenues ranging from money management to trust, to venture capital, to trading. …

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