Bank stocks' problem isn't just rates

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Third-quarter earnings season starts in earnest next week, when the big banks start to report. Expectations for the group appear to be low and falling. In the past week, bank indices have underperformed the wider market by a couple percentage points, and certain banks' shares look downright sickly.

Article originally published by The Financial Times. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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06 Oct 2023

What is going on? One candidate explanation is that long-term interest rates have been rising, which means that banks’ securities portfolios will have to be marked down again. Because most of these securities are accounted for as hold to maturity (HTM), this will not directly affect capital or earnings. But HTM losses are disclosed, and they make people a little jumpy when combined with other risk factors. Several banks discovered this, fatally, in the mini bank crisis back in March. Goldman Sachs estimates that securities losses grew from $525bn to $683bn over the course of the third quarter. Hypothetically, if (let me say again: if) these losses were taken out of capital, it would move the industry’s tier one equity ratio from 10.9 per