High-interest rates are here to stay for the foreseeable future. Financial services stocks promise to be some of the most affected by the Fed’s pronouncement. Though markets dipped hard this week and portend further downside, some financial services stocks haven’t yet had a complete reckoning.
Rate hikes affect multiple aspects of typical financial services companies. Higher rates mean higher borrowing costs. Higher interest expenses eat into their bottom line and cut into revenue as fewer customers solicit loans. High rates typically lead to stock losses meaning fewer will be seeking financial advice and wealth management strategies.
Many consumers will be too busy staying afloat to worry about investment strategies. Watching investments lose value can also increase people’s fear and lead to lower demand for wealth management services.
These three stocks may be hit hard in the coming months by elevated rates. It may be worth trimming or dumping these stocks before the damage is done.
Morningstar (MORN)
Morningstar (NASDAQ:MORN), a renowned independent investment research platform with wealth advisory verticals, is having a solid year. The stock climbed 7% since January, although recent central banking moves made shares slide slightly.
But, though Morningstar’s share price seems bullish, its fundamentals say differently. Though the company managed a respectable 7.3% year-over-year revenue increase in the second quarter, operating income reveals the real concern. That metric tells a far less optimistic tale. Morningstar suffered a substantial 22.6% year-over-year decline in operating income. Likewise, the company’s profit margins eroded into the low teens, significantly departing from past profitability.
This downturn stems from multiple factors, including revenue slumps in some of their more cyclical products and a substantial expense surge. While the company insists these investments in human capital and the expansion of their product offerings are strategic moves, positioning them for future success, the immediate impact on profitability raises red flags.
Morningstar, to be sure, isn’t going anywhere. But today, the company trades at a premium, which isn’t a winning proposition amid declining bottom-line metrics and “higher rates for longer.”
Royal Bank of Canada (RY)
Royal Bank of Canada (NYSE:RY), the largest bank in Canada by market capitalization, hasn’t ducked challenges to financial services stocks this year. Shares have declined by 6% since January, but more pain is imminent for shareholders.
RBC reported a net income of $3.9 billion in the latest quarter, showcasing an 8% increase compared to the prior year. Likewise, the company saw its diluted EPS jump 9% to $2.73, surpassing analyst estimates. But there are underlying concerns worth noting.
While lower taxes and a robust Canadian market contributed to these results, RBC’s plans to cut over 1,000 jobs as part of a cost-cutting strategy hint at a more intricate financial landscape. The bank’s anticipation of slowing growth and lower inflation, influenced by delayed monetary policy impacts, amplifies the cautionary notes.
Furthermore, RBC faces headwinds stemming from uncertainties related to China’s slowdown, heightened climate concerns, and geopolitical risks, all of which could impact the bank’s global operations.
Additionally, the evidence of a faltering labor market in Canada, characterized by stagnant wage growth, diminishing job postings, and an uptick in unemployment, cast shadows over the prospects of the bank’s consumer banking business.
These multifaceted challenges and the bank’s proactive job-cutting measures warrant a closer examination of RBC’s long-term resilience and growth potential in an increasingly complex financial environment.
Banco Santander (SAN)
Banco Santander (NYSE:SAN), a prominent Spanish multinational financial services sector player, is on a tear this year. But the recent upward trajectory comes with its own set of challenges.
In its most recent quarterly earnings report, released on August 4th, Banco Santander reported earnings per share of $0.34 for the period. While this figure represented a respectable performance, it fell slightly short of analysts’ consensus estimates, creating a subtle note of concern.
Under the leadership of CEO Hector Grisi, Banco Santander has embarked on a significant reorganization effort. This strategic move will streamline the bank’s operations and achieve ambitious profitability targets. While this restructuring plan may hold promise, it also introduces an element of uncertainty. Uncertainty is poison to nervous investors, and a general environmental malaise could scare traders away.
Ultimately, the bank’s ability to navigate changing market dynamics amid rapid restructuring is an ambitious play that could pay dividends. However, ballooning borrowing costs and tighter margins could make restructuring a delicate dance. This stock could outperform over the long term but the uncertainty surrounding this stock makes it less desirable for investors.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
