Deutsche Bank (NYSE: DB) and JPMorgan (NYSE: JPM), along with most financial stocks, have been major underperformers. In the past six weeks, JPMorgan is down nearly 15%, and Deutsche Bank is down 20%.
One major contributor to this poor performance is a recent report from BuzzFeed and the International Consortium of Investigative Journalists. The report alleged that banks were moving money that their compliance departments were marking as possible money laundering or criminal activity - nearly $2 trillion in total.
Deutsche Bank reportedly transferred $1.3 trillion, while JPMorgan handled $514 billion. The banks were quick to push back on these reports. JPMorgan said that the company reports these transactions to the U.S. government to "help law enforcement combat financial crime." Deutsche Bank said that "the information was not new to the company or reporters".
Stock Price Impact
Financial stocks have been major underperformers since the market low in March. They've been hurt by a variety of factors including the rock-bottom interest rates, the Federal Reserve's forward guidance, and dovish policy tilt, small business bankruptcies, weak loan demand, and economic stress in certain areas.
Banks do their best with a steep yield curve, demand for loans, and a growing economy which leads to a lower default rate. Currently, none of these factors are in play. The yield curve is flat which means that the spread which makes lending profitable is compressed.
It's also hard to imagine what would make long-term rates rise given that the Fed has made it explicit in so many ways that interest rates aren't rising anytime soon. Congress' failure to reach an agreement on a stimulus deal also looks less likely with the election coming, the usual acrimony coming up, and failure to reach a compromise. The Supreme Court's vacancy will only intensify the partisanship which will also decrease the odds of a stimulus deal.
While on an aggregate level, the economy is doing better than expected. There are still some areas of distress including small businesses, many service-based businesses, travel, and hospitality businesses. Unemployment is coming down, but there were still 800,000 people who filed unemployment claims last week. In a sense, short-term unemployment is decreasing, but long-term unemployment may be increasing due to shifts in the economy caused by the coronavirus.
All of these factors point to a higher default rate which is also negative for the banks. Even with a stimulus deal, banks' performance wasn't too great following an initial spurt higher. Without a stimulus deal, it's likely that their underperformance continues.