Financial stocks are struggling on multiple fronts.
First, legacy financial and banking institutions face increased credit risk as high rates push depositors away and into money market funds and fixed-income investing on their own. Likewise, Treasuries on their balance sheets are increasingly volatile. They represent significant leverage risk if forced to sell at a loss (like we saw with Silicon Valley Bank earlier in the year).
Conversely, fintech and similar startups struggle to adapt to an era where value is king. High-flying growth isn’t the guarantee it once was, and limited profitability means limited prospects.
These three stocks are struggling the most and might not make it out of the current economic landscape unscathed if they aren’t careful.
Robinhood Markets (HOOD)
Robinhood Markets (NASDAQ:HOOD) is shooting itself in the foot with its newest push to profitability. Famous as the “fee-free” broker option, many stuck with Robinhood even after some questionable practices came to light. But now, Robinhood’s slim margins force it to renege on the deal struck with customers.
Robinhood now charges up to $0.03 in new options fees per contract. The literal pennies aren’t a fortune, true. And the expenses go towards offsetting Robinhood’s own costs rather than lining executive pockets.
Yet, the move is still troubling. Specifically, it highlights that Robinhood’s dwindling user base will be increasingly milked, whether to reinforce Robinhood’s bottom line profitability or to offset the costs of doing business. Initially, Robinhood sold users on a specific paradigm that didn’t include iterative fee increases. So, customers are well within their right to jump ship on this financial stock immediately.
Comerica (NYSE:CMA) is facing delisting from the S&P 500 in just another wave of bad news for this regional banking stock. CMA beat earnings expectations last week. But investors continued selling shares and extended the ongoing stock selloff trend.
Increased investor and depositor enthusiasm for self-guided fixed-income investing adds pressure on legacy banks to maintain their customer base. Likewise, Comerica’s net deposits fell nearly 11% due to increased consumer debt and attractive self-guided income investing.
While the company kept interest expenses under control, high-interest rates mean Comerica’s total cost exceeded expectations. Additionally, those high interest rates are eating into a core of the regional bank’s business model of loans and lending. Across the board – personal, auto, mortgage, and more – consumers borrow less as high-interest costs scare them away. That led to Comerica’s net loan package falling by over $1 billion. Lending interest, origination fees, and expenses make up a huge chunk of regional banking profitability. Thus, today’s landscape poses a serious ongoing risk for this financial stock.
Citigroup (NYSE:C) is below its pre-pandemic pricing, with more room to drop. The company is the latest big bank on the chopping block. In fact, overseas employees already see the writing on the wall as layoff rumors abound.
Sadly, the financial stock is struggling with tepid leadership.
“Management doesn’t expect to hit its return targets until two to four years from now, and the bank has historically underperformed. It’s not worth waiting around for this historical value trap,” a Morningstar analyst summed up the bear thesis in a damning note.
And peeking below the surface reveals further trouble. The company is on shaky enough ground that its preferred shares are too pricy. This could surely trigger a massive investor outflow if they fail to pay expected dividends. Credit expenses are ballooning despite revenue jumps, and Citigroup’s earnings forecast emphasized cost-cutting above all else. When expense slashing is an executive theme, it usually serves as a telltale sign of more trouble to come for financial stocks.
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.