With few exceptions like homebuilders, tumbling energy prices are great news for most sectors of the market, but for now, at least, you can add financials and bank stocks to the list of oil casualties.
Here’s why: The financial crisis and recession were more than half-a-decade ago, but banks are still laboring under the strict supervision of the Federal Reserve and new regulations. The Fed is determined to keep a tight leash on risk, so banks and certain other financials can’t hike dividends or spend money on share repurchase programs without the Fed’s okay.
Fair enough. Sure, forcing banks and some financials to keep more cash in reserve in case something big goes wrong can be frustrating. After all, idle cash doesn’t earns the banks — or shareholders — any return.
But that’s the price we pay to take some risk out of the system. Making banking boring again isn’t necessarily the worst thing, and there’s nothing wrong with rethinking the position of bank stocks in the average portfolio.
However, one thing even the most risk-averse investors in bank and financials stocks have been counting on is the return of dividends. A sector that was once a steady fountain of dividends has slowed to a trickle, and banks can’t open the spigots without Fed approval.
Heading into 2015, investors had every reason to expect the Fed to okay higher dividends this year. Banks have more than ample capital in reserve, the thinking goes. so let them give some of that back to shareholders.
But then the bottom fell out of the oil market.
Banks Stocks and Oily Balance Sheets
Benchmark prices for Brent crude oil were topping $110 a barrel last summer. Since then, they’ve crashed below $50 to close in on a six-year low. That’s right: Energy prices haven’t been this beaten down since the Great Recession.
Most sectors love cheap oil. When consumers spend less money on gasoline, they have more money to spend on everything else. That’s great for consumer discretionary stocks. A host of other sectors get a big lift from cheap oil because it cuts their own bills for everything from electricity to raw materials.
Banks and bank stocks, however, find themselves exposed to more risk because of falling oil prices. Lots of energy companies are capital intense, and they get some of that much-needed capital by borrowing from banks. With oil below $50, there are very credible fears that banks’ commercial loan books could be hit with waves of defaults.
Given that threat, it’s unlikely the Fed will approve any really generous dividend increases this spring. It may even put the kibosh on some banks’ capital plan entirely.
Bank stocks sure could have used the tailwind of higher dividends. As it is, the industry has been having a hard time growing revenue and the low-interest-rate environment is keeping a tight lid on net interest margins.
Higher dividends sure would make bank stocks more attractive, but it looks like investors are going to have to keep waiting.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
