Banks stocks try but fail to brush off rate woes

Bank investors tried, but failed, to shrug off the prevailing view that lenders won't get a profit boost from rising interest rates until at least 2016.

Shares of JPMorgan Chase popped 3.5% at the open, while Bank of America's stock jumped 5% and Citigroup's shares rallied 3.8%. The banks lost those gains when the broader market fumbled later on, but they finished the day better off than the Dow or S&P 500. JPMorgan closed down 0.5% to $59.91, while BofA ended down 0.2% to $15.26 and Citigroup closed down 0.9% to $49.88.

While U.S. stocks are broadly suffering from fears of an economic slowdown in China, the big banks have been shaken by fears that their earnings could suffer a direct hit. The U.S. banking sector has very little revenue exposure to China, but their stocks are vulnerable to that country's woes because they could impact interest rates in the U.S., which directly affect bank earnings.

Wall Street now agrees there's very little chance the Federal Reserve will raise U.S. interest rates until at least December — if not later. That means banks won't likely feel the benefits until well in next year.

Wall Street analysts Tuesday helped spur the initial bank rally by touting recent stock losses as a buying opportunity. CLSA banking analyst Mike Mayo upgraded JPMorgan to a "buy" rating from an "outperform," citing the bank's ability to gain market share during tough times.

"Like the basketball player LeBron James, JPM is good at both offense and defense," Mayo said.

BofA, meanwhile, was boosted by an upgrade by research analysts at Bernstein, which raised their rating on the bank to "outperform" from "market perform" with a $19 price target. BofA's stock sell-off provides an attractive opening for investors to buy a "franchise with longer term potential to benefit from higher rates, improved operating leverage, and expanding capital return," Bernstein said in a research report.

On Monday, researchers at Keefe Bruyette and Woods (KBW) also upgraded BofA to "outperform" with a $20 price target, citing the cheap stock price.

Before China became a word on every investor's lips, investors had been anticipating turbocharged bank earnings on mortgages and other loans in the near future, thanks to expectations of rising rates. A rate hike "is by far the single biggest positive catalyst remaining for bank stocks," BofA banking analysts said this month.

The implied probability of a September rate hike has fallen to 20% to 30% from 50% to 60% in early August, the Office of Financial Research, a unit of the U.S. Treasury Department, said Monday.