Strong earnings report can't stop sell-off! Credit concerns intensify as US bank stocks record longest losing streak since 2008

According to Zhihui Finance APP, despite the continued strong performance in earnings reported so far by some of the largest U.S. banks, U.S. bank stocks are facing their longest-lasting decline since the 2008 financial crisis.

Last week, the results announced by the four largest U.S. banks once again provided strong evidence that the financial health of U.S. consumers and corporate clients remains resilient, even with significantly rising borrowing costs. JPMorgan (JPM.US), Bank of America (BAC.US), Citibank (C.US), and Wells Fargo (WFC.US) collectively set aside $760 million in credit loss provisions in the third quarter, down about 3% from the same period last year. Actual loan losses at these four banks dropped 5% over the same period, while the volume of loans grew by nearly 10%.

However, investors seem unconvinced. On Monday, the benchmark KBW Nasdaq Bank Index (BKX) slipped slightly. Data shows that the index has fallen for six consecutive weeks, down a cumulative 11% since early September, marking the longest streak of weekly losses since the 2008 financial crisis.

This sell-off in U.S. bank stocks is happening as global credit managers appear increasingly concerned about what could happen next. A recent survey of portfolio managers from major banks and other global financial institutions found that about 60% of respondents expect the global corporate default rate to rise over the next 12 months. Meanwhile, 85% of respondents anticipate that the credit spread for North American junk bonds will widen over the next three months.

These proportions have increased sharply compared to the results of the same survey from the second quarter. At that time, only 40% of respondents expected the corporate default rate to rise over the coming 12 months, and 50% anticipated North American junk bond spreads would widen in the following three months.

Som-lok Leung, Executive Director of the International Association of Credit Portfolio Managers, said in a statement sent by email that credit portfolio managers “do see that investors still have some risk appetite, but they are also finding that quite a few businesses that have been struggling to stay afloat are starting to reach their limits.”

Morgan Stanley analysts said in a report to clients on Monday that apart from certain weak spots in commercial sectors, banks’ overall credit quality remains “healthy.” However, so far this month, bank executives speaking on earnings calls have been more cautious overall compared to the second quarter.

Investor concerns are focused on one key issue—whether persistently high interest rates will eventually put pressure on borrowers. Bank of America analyst Ebrahim Poonawala wrote in a report on Monday that by the same logic, a decline in rates “could potentially drive a rebound in bank stocks.” He added: “Ideally, such a scenario should be based on falling energy prices or easing inflationary pressures.”

However, Citizens Financial (CFG.US) CEO Bruce Van Saun said that the market’s concerns over current borrowing cost levels are “overblown.” Van Saun stated, “I think some of these concerns are being exaggerated.” He pointed out that the current level of interest rates “is actually not enough” to put pressure on the bank’s borrowers or restrict its deal-making business. He did acknowledge, though, that there remains “a lot of uncertainty” about how much further rates could rise.