The stock market is taking a beating on Monday, with the S&P 500 down by about 6% as of 11:25 a.m. EDT. The banking industry is doing even worse, with the Financial Select Sector ETF (NYSEMKT:XLF) falling more than 8%. And regional lender Western Alliance Bancorp (NYSE:WAL) is getting hit especially hard, dropping nearly 15%.
The primary way that most banks make money (including Western Alliance) is simple: They borrow money at relatively low interest rates and lend that money out at higher rates. When market interest rates rise, the spread between these two rises. And when rates fall, like they've done dramatically recently, bank margins get squeezed.
Simply put, Western Alliance has a lot of profit to lose. Because of its highly profitable focus on niche lending, its average yield on its assets (loans) is 5.3% and its net interest margin in 2019 was 4.52%, well above its peer group average of 3.49%. And the bank pays very little interest on its deposit base (about 40% are noninterest bearing), so it doesn't have much room to make its cost of funds any cheaper.
More broadly, fears about the novel coronavirus and the plunge in crude oil prices are adding to investors' unease.
In a nutshell, if bank margins take a dive -- as it looks like they will -- Western Alliance could feel the squeeze more than most. It remains to be seen how long this ultra-low interest environment could last, but if it persists, it could be rough times ahead for bank stock investors.