The combination of higher inflation and higher rates has caught up with bank stocks, now on course for their worst monthly performance in more than two years.

The S&P 500 Banks Index has fallen 9.2% in April, on track for its biggest one-month drop since March 2020, erasing about $120 billion in market value.

A spate of supportive first-quarter earnings has failed to boost shares of financial institutions, including Bank of America Corp., Truist Financial Corp. and Fifth Third Bancorp, which have lagged broader markets on a growing realization that the risk of recession outweighs potential gains in margins due to higher borrowing costs. 

For some investors and analysts, the slump in bank stocks is particularly confounding as the surge in U.S. Treasury yields, something that would typically help boost shares, is having limited effect. In fact, while the 10-year Treasury yield is sitting near its highest level since 2018, its 40-day correlation with banking stocks has become the most inverted in three and a half years.

“Banks are historically strongly correlated to bond yields direction, but due to recent growth concerns have opened up a gap with yields,” JPMorgan Chase & Co. strategists including Mislav Matejka wrote in a note.

Positive correlation between bank stocks and U.S. yields has reversed
A solid quarter for earnings hasn’t helped with buoying shares. Big banks reported strong trading revenues while also seeing continued net interest income growth. Still, large-cap names including Wells Fargo & Co. and Bank of America have each dropped at least 3% since delivering better-than-expected results this month.

At its annual meeting held Tuesday, Citigroup Inc.’s Chief Executive Officer Jane Fraser said the bank doesn’t expect inflation to derail U.S. growth.

The disconnect between share performance and earnings “is the biggest frustration for many bank stock investors, but it’s also somewhat understandable given rising fears of an economic slowdown/recession,” said Deutsche Bank analyst Matt O’Connor.

That sentiment was echoed by Wells Fargo analyst Mike Mayo, who on Tuesday said he doesn’t understand why Bank of America shares, which are down more than 18% in 2022 versus a 14% drop for the KBW Bank Index, are underperforming so badly this year.

“I can’t believe that with all these interest rate hikes that benefit Bank of America more than any other large bank, that this stock is down so much year-to-date,” Mayo said in an interview with Bloomberg Television.

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