What happened

Shares of many large bank stocks fell today along with the broader market sell-off that saw the Dow Jones Industrial Average shed more than 600 points and the S&P 500 index fall 1.7%. Shares of Citigroup (NYSE:C) fell close to 4%, while shares of Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), and JPMorgan Chase (NYSE:JPM) all dropped more than 3% today.

So what

Banks across the board are sliding today with the KBW Nasdaq Bank Index, which tracks the largest banks in the U.S., falling nearly 3%. Large banks are considered to be more stable, so any kind of 3% or 4% move is significant.

The decline partly had to do with the broader market sell-off, which was stoked by fears surrounding the Chinese real estate market, and more specifically the large Chinese property developer, Evergrande Group, which is facing billions in debt and potential default.

The scare sent investors leaving stocks and rushing into bonds. When there is demand for bonds, the price of bonds increases, which inversely lowers the yield that those bonds pay out. One of the biggest indicators of bank profits is the yield on longer-term bonds such as the 10-year U.S. Treasury bill, which fell to around 1.31% today. Many bank loans are tied to yields on the five-year and 10-year U.S. Treasury bills, so when the yields on those bonds fall, so do most bank stocks. 

Building with the word bank on it.

Image source: Getty Images.

Seeing as most deposit costs at banks have bottomed at this point, lower loan yields and the threat of loan yields staying lower for longer puts pressure on bank margins, which in general is the difference between bank deposit costs and loan profits.

It's a little bit harder to tell why some banks are down more than others. One potential reason could be individual bank exposure to China. Citigroup, for instance, is much more global and has some decent exposure. The bank, according to its recent quarterly filing, has nearly $20 billion of assets in China, which makes up about 1.1% of total loans at the bank. Bank of America also had about $14 billion of assets in China, while JPMorgan also has nearly $20 billion of asset exposure in China.

I don't necessarily know if investors are basing their selling on banks with specific Chinese exposure because the Chinese real estate market is impacting the whole market, but it's something to consider.

Now what

While it's been a tough day for the market and some are viewing Evergrande as facing a similar situation as Lehman Brothers, which infamously failed during the Great Recession, I think it's probably too early to go into full panic mode just yet.

Giles Coghlan, chief analyst at HYCM, told Yahoo! Finance today that he believes it's very unlikely the Chinese government will allow Evergrande to fail. Stocks have been marching higher for a long time, so I think markets are hypersensitive right now to any kind of bad news, as a general market correction has been suspected for some time.

I still remain bullish on the long-term outlook for banks right now. Bank stocks, in my opinion, benefited greatly from the pandemic and are in great shape to succeed when you consider that loan growth has been non-existent for the last year, banks have been adopting new technologies, and interest rates will eventually march higher.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.