The biggest losers of 2016 so far are the world’s largest banks.
Not only do big banks have to suffer the slings and arrows aimed at them by the political class, but increasingly investors are abandoning them in droves. That’s according to analysis by The Wall Street Journal, which found that 20 of the world’s largest banks have lost about one quarter of their value since the beginning of the year, a total decline of $465 billion in enterprise value.
What’s causing the value of banks to crater? The most recent incident is Brexit, an event that has underscored the political uncertainty surrounding markets. British banks like Royal Bank of Scotland were particularly battered after the June 24 vote, as shareholders worry about their ability to service clients outside the U.K. post-Brexit.
But the big banks’ problems extend far beyond isolated political risks. The most important dynamic dragging down the value of bank stocks is overall investor sentiment toward the global economy and the path of future interest rates. Since 2010, banks in the United States have been contending with declining net interest margins, or the difference between what they earn in interest payments and what they pay out to their customers:
As you can see, there isn’t a direct relationship between interest rates and net interest margin, but it’s clear that banks ability to make a profit right now has been eroded away by competition in a global environment of extremely low rates. Investors had been hoping that with the Fed looking to raise rates several times this year, that this dynamic might change, freeing banks to charge more for lending money.
But a combination of a stubbornly sluggish economy and shocks like the Brexit vote have put any thoughts of higher rates on the backburner. Furthermore, belief that chances of another recession are growing are causing investors to flee riskier stocks, like opaque financials, for safer and easier to understand investments.
