What happened
Shares of First Financial Bancorp (FFBC -0.22%) fell 13.2% in March, according to data provided by S&P Global Market Intelligence, after the Midwestern bank was hit by a downgrade early in the month and then was caught up in a broader Federal Reserve-inspired sell-off as the month dragged on.
So what
First Financial, like many consumer lenders, had been an outperformer in the opening months of 2019, up more than 18% for the year as of late February. Bank stocks had gotten a charge from some high-profile merger announcements, strong credit trends, and the continued resilience of the U.S. economy.
Image source: Getty Images.
That jump caused a team of Stephens analysts to reassess their position on shares of First Financial and other banks, determining that after the run-up, the risk/reward potential for the stocks was less attractive. For that reason, they downgraded shares of First Financial and seven other financial institutions to "equal weight" from "overweight" on March 6.
The downgrade was well timed, because just a few weeks later, the Federal Reserve took an unexpected dovish turn, throwing future rate increases into doubt and pressuring shares of companies like banks that tend to benefit from a rising rate environment. The losses mounted as 10-year Treasury bond yields fell below the yields on a three-month Treasury, meaning the yield curve was inverted for the first time since 2007. Investors often view an inverted yield curve as a sign of economic trouble on the horizon.
Now what
First Financial is a decent bank, with a 1.4% return on assets, and thanks to a 10% dividend increase in January, it offers an attractive 3.22% yield. But investors would do well to listen to the warning the Fed is providing. It feels like the wrong point in the cycle to buy into a midsized commercial bank, especially one with exposure to Rust Belt markets that could be hit hardest in the event of a recession.
