By Telis Demos
Stagflation is a bad scenario for anyone, and often especially so for banks. The economy might still be far from that point. But even the mere whiff of it is giving bank investors fits.
Bank stocks are usually not where investors want to be if they are at all worried about stagflation, the dual problems of high unemployment and high prices. On the credit side, the performance of consumer loans like credit cards tend to be correlated with job losses. Companies could also struggle with debts if they face higher input costs.
And if savers start to incorporate an energy-shock-driven bout of inflation into their plans, a natural response would be to try to protect their cash by seeking out higher yields. So banks could once again face pressure on their crucial deposit costs. Deposit flights were part of what shook banks in 2023.
Banks have the ability to offset that pressure by lending or investing at higher rates. But if the Federal Reserve doesn't want to raise rates in response to inflation, that becomes much harder to do. Energy shocks are notoriously hard for central bankers to deal with. A lot of loans are tied to the prime rate and other benchmarks driven by the Fed's short-term targets.
So, growing fears that surging oil prices could cause even mild stagflation have already driven substantial underperformance for bank stocks. The KBW Nasdaq Bank Index is down more than 9% so far this year, while the S&P 500 is down about 3.5%.
During the years between 1974 and 2024, with inflation above its 10-year average and gross domestic product growth below that, U.S. financial stocks had the worst average annual real returns among all sectors, according to a research piece from Schroders.
And it can get even worse. During the 1970s, financials trailed the S&P 500 by the widest margins in 1974 and 1975, according to annual nominal price performances compiled by Deutsche Bank. Those were the years when the Fed was cutting rates to combat a weak economy, despite that decade's battle with inflation.
Nowadays, though, there could be some positive offsets. The Wall Street trading houses could see another revenue boost on their desks, driven by volatility in commodity or rates markets.
Bank of America, for example, said March 10 that so far in the first quarter, its global markets business was "up low double digits" from the same point a year earlier. Citigroup said that week it was anticipating midteens growth in trading.
Some bankers in recent comments have said that demand for traditional commercial loans has been improving in early 2026. As of the Fed's most recent weekly tracking, commercial and industrial loans were up 5% year over year, the fastest rise in almost three years. Having more loans can offset earning a smaller margin on each loan.
Yet banks will need to be wary of credit risk. The economy might be nowhere near the unemployment levels that have plagued past stagflationary periods. Yet there is widespread concern that there might be pockets of troubled loans, especially among nonbank lenders like private credit funds that focused on software companies or certain kinds of consumer loans.
Banks are sometimes lenders to these funds. As of the fourth quarter, U.S. banks were lending around $380 billion to so-called business-credit intermediaries, which include the kind of private-credit funds facing redemption requests, according to S&P Global Market Intelligence. They also had committed $170 billion in potential additional lending to those borrowers, according to figures compiled by Adam Josephson, founder of Sakonnet Research.
High oil prices would present a range of risks to banks' customers. Especially if translated into higher gasoline or sticker prices at the store, that could flow into consumer or corporate credit.
The aftereffects of the 2023 crisis might have lingered long enough that banks are still positioned relatively well to shield against more deposit flight. One way is to lock up funds. There has recently been a decline in the number of banks marketing $10,000 one-year certificates of deposits with rates over 4%, according to S&P Global Market Intelligence. But the number of banks advertising such CDs at 3% or higher has dipped only slightly since the Fed began cutting rates in 2024.
Still, if consumers start watching deposit rates as closely as they do the prices at the pump, it will make for tough times at banks.
Write to Telis Demos at Telis.Demos@wsj.com
(END) Dow Jones Newswires
March 20, 2026 05:30 ET (09:30 GMT)
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