What happened
Shares of regional banks joined the broader parade of stocks that plunged in March, with investors running for the exits as the impact of the COVID-19 coronavirus pandemic became clear. Banks make their money based on the amount of interest they can charge when making loans, and if the economy ends up in a recession, bank profits are going to take a hit.
Shares of Truist Financial (TFC 0.53%) fell 33.2% for the month, according to data provided by S&P Global Market Intelligence, while shares of Huntington Bancshares (HBAN -0.22%) fell 33.1% and M&T Bank Corp. (MTB -0.35%) and CNB Financial (CCNE -0.78%) were down 26.3% and 24.7%, respectively.
So what
March was one of those months where nothing seemed to go right for investors. The pandemic caused markets to fall and brought the economy to a halt, causing jobless claims to skyrocket and putting the U.S. economy on course for a recession.
Banks tend to do poorly in a recession, as demand for loans tend to fall and there are fewer borrowers able to make their payments. In a typical recession, default rates -- the percentage of loans that a lender has written off after a prolonged period of missed payments -- tend to go up. Given the sudden nature of this downturn, with so little warning or time to plan, default rates could be higher than normal this time around.
Image source: Getty Images.
In mid-March, the Federal Open Market Committee stepped in to try to help the economy, but the Fed didn't do much to make bankers' lives easier. On March, 15 the Fed slashed the benchmark federal funds rate by 100 basis points to a target range of 0%-0.25%. The cut followed a 50 basis-point rate cut just a few weeks prior.
Banks make their money on the difference between the interest rate they charge for loans and the interest rate they pay out on deposits. In a low-rate environment, both sides of that equation are squeezed, making it hard for banks to make outsize profits.
Now what
The pandemic didn't disappear with the changing of the calendar, but overall sentiment about how bad it will be and how long it will take for the economy to recover has improved in the early days of April. All four of the banks listed above lost another 10% or more in the first few days of April, but all but CNB have gained back those losses in the days since.
That said, we're not out of the woods yet. The pandemic has taken thousands of lives and displaced millions of workers. It seems nearly certain that the U.S. economy is either already in a recession or soon will be. The question now is whether the recession will last into 2021 or if there'll be a quick rebound.
These are solid businesses that have important inroads in their communities and should be able to weather a recession, but the stocks are unlikely to rocket higher until the lending environment improves. Truist, which was formed late last year via the merger of BB&T and SunTrust, has a particular challenge ahead as management tries to complete a large integration during a downturn.
All of these companies are worth a close look by investors, but given the economic climate we're in and will likely remain in for the next few months (at least), there's no reason to rush in to buy the shares.
