After the failure of SVB and Signature Bank in quick succession, regional bank stocks have crashed. Here’s what Wall Street thinks about the recent price action.
The SDPR S&P Regional Banking ETF plunged yesterday and hit its 52-week low of $41.92 intraday. While it rebounded from the day’s lows it still lost 12.3%. First Republic Bank was particularly weak and lost almost 62% for the day.
Citi analyst Keith Horowitz believes that deposit flight is the major risk for regional banks and added that banks that have a higher share of uninsured deposits or have less diversification in the deposit mix are particularly at risk.
Regional bank stocks tumble
Oppenheimer analyst Chris Kotowski also echoed similar views and said “Unfortunately, one of the first consequences of SIVB’s collapse is probably that it will cause a flight of uninsured deposits from smaller, less diverse banks to larger, more diverse ones. That said, just about all banks are likely to want to increase their retail funding.”
JPMorgan analyst Kabir Caprihan is apprehensive that despite the US government providing a backstop for depositors at SVB and Signature Bank, large depositors at regional banks might still move funds to other banks.
Run on banks
Notably, banks face a run when they witness a wholesale exodus of deposits. Something similar happened with SVB and despite selling its bond portfolio at a massive loss, it wasn’t able to make up for the falling deposits. After SVB announced the capital raise, in a single day, depositors pulled out $42 billion from the bank which left its cash balance with the Federal Reserve in the negative.
Regional banks might see a rise in costs for banks
Bank of America analyst Ebrahim Poonawala said that regional banks might need to offer more interest on deposits amid the increase in perceived risk. He said, “We believe that regional banks are likely to experience higher funding costs (as the industry gets more aggressive on deposit retention) and potentially higher operating costs (greater compliance burden) as regulators likely reevaluate the existing capital/liquidity risk framework.”
Meanwhile, the steep fall in First Republic Bank has left many surprised as unlike SVB which saw a fall in deposits last year, First Republic’s deposits rose 13% in 2022.
commenting on First Republic Bank, Atlantic analyst John Heagerty said “We note that the bank has increased its geographic diversification over the past decade with loan exposure to the wider San Francisco area now down to 34% (from 56% two decades ago). The bank’s lending portfolio is also low risk and well diversified by type.”
Meanwhile, the stock cratered yesterday amid the general pessimism toward regional banks.
Jim Cramer finds regional banks as vulnerable
Jim Cramer believes that regional banks are still vulnerable. He however said that markets “dodged a major bullet” amid the quick action by federal agencies. Cramer added that the US might have headed for a “full blown” recession if not for the timely intervention.
Notably, recession fears have risen and Jeffery Gundlach said that a recession looks “imminent” looking at the steepening of the yield curve. Incidentally, the US yield curve has now been inverted for months which many see as a recession warning.
Fed might slow down the pace of hikes
Meanwhile, many market participants believe that amid the troubles at regional banks, the Fed might take a dovish stance. Gundlach said that the Fed might raise rates by 25 basis points in March to save its “credibility” but would pause thereafter.
Goldman Sachs believes that the US Fed would not raise rates at its upcoming March meeting. That said, Goldman still expects the Fed to raise rates by 25 basis points each in May, June, and July which would take the Fed fund rates to between 5.25%-5.50%.
Ed Hyman of Evercore ISI believes that the Fed should take a breather on rate hikes for now. Here it is worth noting that Powell has said multiple times that the US central bank is committed to lowering inflation to its targeted 2%.
Powell reiterated his views at last week’s Congressional testimony and spooked markets with his hawkish comments.
In his prepared remarks for the Congressional testimony, Powell said, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
The outlook for rate hikes has changed drastically over the last week.
At the beginning of the last week, a 25-basis point rate hike at Fed’s March meeting looked almost like a done deal. However, after Fed chair Jerome Powell’s Congressional testimony, traders started bracing for a 50-basis point rate hike.
However, amid the crisis at regional banks, a 50-basis point rate hike in March pretty much looks off the table.
Meanwhile, CME’s Fed Watch tool shows that 78.2% of traders see a 25-basis point rate hike at Fed’s March meeting while the remaining 21.8% believe that the Fed won’t raise rates.
On Sunday, only 2.6% of traders bet that Fed won’t raise rates at its March meeting.
Is there a buying opportunity in regional banks?
Meanwhile, even as market sentiments towards regional banks have soured, Christopher Marinac, Director of Research at Janney Montgomery Scott believes that the crash is a good opportunity to load up on regional banks. He is particularly bullish on Fifth Third Bank.