In the wake of the Federal Reserve’s first interest rate increase since December 2018, Federal Reserve Chairman Jerome Powell indicated that interest rates would be increased aggressively this year to tame surging inflation. With inflation at its highest level in four decades, with a surge in global commodity prices, the Federal Reserve is expected to deliver two back-to-back half-point interest rate hikes–one in May and one in June. A rise in interest rates is generally beneficial for financial companies because it helps them increase their revenues. However, the impending interest rate hikes come with the risk of an economic slowdown, especially in an economy that has gotten used to low borrowing rates over the past few years.
In addition, rising energy costs have concerned investors as crude oil prices have remained consistently over $100 per barrel in recent months. Recessionary conditions have historically followed high crude oil prices. ING’s Chief International Economist James Knightley said, “With the Fed seemingly feeling the need to ‘catch up’ to regain control of inflation and inflation expectations, a rapid-fire pace of aggressive interest-rate increases heightens the chances of a policy misstep that could be enough to topple the economy into a recession.”
In a recessionary environment, financial institutions may witness a fall in loan demand, and they might have to increase their allowances for bad loans. Moreover, recessions foster other financial challenges like bankruptcies and foreclosures. Given this backdrop, we think it could be wise to now avoid the stock of Wells Fargo & Company (WFC), Synchrony Financial (SYF), and PennyMac Mortgage Investment Trust (PMT).
Wells Fargo & Company (WFC)
Financial services company WFC in San Francisco provides a diversified set of banking, consumer and commercial finance, investment, and mortgage products and services. It operates through four segments: consumer lending, retail banking, corporate and investment banking, and wealth and investment management.
WFC’s total revenue declined 5% year-over-year to $17.59 billion for the first quarter, ended March 31, 2022. The company’s net income declined 20.8% year-over-year to $3.67 billion. Also, its EPS came in at $0.88, representing a 13.7% decline year-over-year.
Analysts expect WFC’s EPS and revenue for the quarter ending June 30, 2022, to decrease 31.9% and 10.8%, respectively, year-over-year to $0.94 and $18.08 billion. Over the past three months, the stock has lost 17.6% to close the last trading session at $44.58.
Synchrony Financial (SYF)
SYF in Stamford, Conn., operates as a consumer financial services company in the United States. It provides credit products, private label credit cards, dual cards, co-brand and general-purpose credit cards, short- and long-term installment loans, consumer banking products, and deposit products, including certificates of deposit, individual retirement accounts, and money market accounts.
For its fiscal quarter ended March 31, 2022, SYF’s net interest income decreased 1% sequentially to $3.78 billion. The company’s net earnings declined 9.1% year-over-year to $932 million. Also, its net earnings attributable to common shareholders declined 9% year-over-year to $922 million. In addition, its return on assets came in at 4%, compared to 4.3% in the year-ago period.
For the quarter ending June 30, 2022, SYF’s EPS is expected to decline 32.1% year-over-year to $1.44. Over the past six months, the stock has declined 23.3% in price to close the last trading session at $37.51.
PennyMac Mortgage Investment Trust (PMT)
PMT is a mortgage real estate investment trust that invests in residential mortgage loans and assets. The Moorpark, Calif., company conducts all its operations and makes investments through PennyMac Operating Partnership, L.P., and its subsidiaries. Its segments include Credit Sensitive Strategies, Interest Rate Sensitive Strategies, Correspondent Production, and Corporate.
PMT’s net investment income declined 74.8% year-over-year to $49.48 million for the fourth quarter, ended Dec 31, 2021. Its net loss came in at $16.88 million, compared to $82.87 million in net income in the year-ago period. Also, its loss per share came in at $0.28, compared to a $0.78 EPS in the year-ago period.
Analysts expect PMT’s EPS and revenue for the quarter ending March 31, 2022, to decrease 53% and 59.8%, respectively, year-over-year to $0.32 and $80.87 million. It failed to surpass consensus EPS estimates in three of the trailing four quarters. Over the past six months, the stock has declined 26.1% to close the last trading session at $14.89.
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WFC shares rose $0.08 (+0.18%) in premarket trading Wednesday. Year-to-date, WFC has declined -6.36%, versus a -11.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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