The United States banking sector had been in the spotlight in the first half of last year, as a series of events shook the industry and the markets. In March 2023, a wave of bond selloffs triggered by rising inflation expectations caused massive losses for banks holding long-term debt securities. In April, several regional banks collapsed due to liquidity problems and credit quality issues, sparking fears of a systemic banking crisis. Furthermore, there are definitely some financial stocks to sell you need to know.
Though there have been no subsequent bank failures, the U.S. government faced a wave of credit downgrades, which also weighed heavily on bank stocks. Some bank stocks, however, were able to perform well due to high interest rates providing them with a hefty net interest margin—the difference between the interest earned on lending and the interest the bank provides to consumer bank accounts.
Interest rate cuts are slated for the second half of this year, and they will have differing effects on financial stocks. Below are some financial stocks to avoid in 2024.
Affirm (NASDAQ:AFRM) is a leading provider of buy now, pay later (BNPL) services, this fintech platform allows consumers to split their purchases into interest-free or low-interest installments. To provide these kinds of flexible payment options, the fintech company has to deal with its own funding costs which are tied to current interest rates. Ultimately, Affirm’s management team expect higher interest rates to weigh on the company’s margins in the near future which could dent earnings prospects.
While interest rate cuts are expected later this year, the precipitous fall in the federal funds rate that many were hoping for will likely not come into fruition. This means, while borrowing costs will come down slightly, they will remain elevated for a longer period of time. Hence the phrase “higher for longer.”
Affirm’s shares have definitely outperformed peers. The stock price has risen nearly 200% over the past 12 months, stretching Affirm’s valuation to unacceptable levels. Because margins are likely to be held back from expanding in the short and medium term and since Affirm’s valuation remains rather stretched, current shareholders investors should find other opportunities in the space instead of keeping the stock in their portfolios.
HomeStreet (NASDAQ:HMST) is a diversified financial services company that provides banking, mortgage and commercial real estate lending, and investment services.
Due to its product end-markets, the financial services company has struggled to navigate the challenging interest rate environment. HomeStreet has tried reducing its loan portfolio size and increasing its deposit base through promotional products and lower cost insured deposits.
However, HMST’s focus on floating rate loan products such as commercial loans, residential construction loans and home equity loans had left the company particularly vulnerable. The housing market is certainly not booming these days, and the commercial real estate market is in an even worse state. The company reported its third quarter 2023 results in early November and on the earnings call, the company noted its net interest margins had fallen from quarter-to-quarter. Avoid this and the other financial stocks to sell.
Even though, U.S. Federal Reserve will cut rates later in 2024, HomeStreet’s business is likely to continue suffering as the interest rate cuts will probably not be dramatic enough to significantly change the lending environment in the real estate sector.
PNC Financial Services Group (PNC)
PNC Financial Services Group (NYSE:PNC) is one of the largest U.S. regional banks, with operations in 29 states and the District of Columbia. The bank offers a range of financial services, including retail banking, corporate banking, asset management and residential mortgage banking. The bank expanded its presence and scale through strategic acquisitions. For instance, it purchased BBVA USA in June 2021, adding $66 billion in loan assets and $86 billion in deposits to PNC’s balance sheet.
Because PNC is a regional bank, the banking crisis negatively impacted it in 2023. The bank saw deposit growth also fall during the bank’s second quarter 2023 earnings print. Moreover, the elevated interest rate environment has also had taken a toll on PNC’s net interest margin. In their Q3 and Q4 earnings prints, PNC reported Y/Y decreases in net interest margins as funding costs overshadowed higher income earned from interest-bearing products.
Overall, in 2023, net interest margin increased only 4% from $2.65 billion in 2022 to 2.76 billion in 2023. Net interest margins could either decrease or remain flat in 2024 as the Fed conducts rate cuts. This could be bad news for PNC’s stock. Avoid these financial stocks to sell like the plague.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.