The regional bank market continues to be a problem. The SPDR S&P Regional Banking ETF (KRE) is getting crushed and is down over 37% YTD. There is still a tremendous amount of stress in the economy and the regional banks are having trouble adjusting. The commercial real estate is in turmoil and regional banks are losing deposits at a very rapid rate. An example was demonstrated by PacWest which had deposits falling in the last week. Here is just a list of some regional banks that are under duress or already faced issues but there could be many more.
- Pacific Western Bank
- Western Alliance Bancorp (WAL)
- Zions Bancorp (ZION)
- Comerica (CMA)
- Silicon Valley Bank (SVB)
- Signature Bank (SBNY)
- First Republic Bank (FRCB)
- East West Bancorp (EWBC)
Some of the issues-
These banks made very cheap loans during the quantitative easing (QE) period. All their loans (assets) are at lower rates, but the Fed has raised interest rates 10 times. Those loans are effectively underwater (explained: Interest Rates and Bonds Prices). Those loans are worth much less than 2 years ago. They need to raise capital with more deposits but that is expensive with the higher rates. If they can’t raise more funds, they must sell their loan portfolios which put them at risk of capital requirements to be a bank.
Additionally, the situation is complicated by the commercial real estate market. With the new world of the ability to work from home, there is no need for as much office space. So, their current portfolio of commercial loans will probably be at low rates, the assets are not worth as much so default protection isn’t as strong and new commercial development is slowing.
There are many negatives in the banking system with the biggest being the strongest able to pick up the weaker ones. The large banks are getting great regional banks for cheap. However, this doesn’t usually play out for the shareholders so be cautious if buying bank stocks now. There is a saying in Wall Street, “Don’t catch a falling knife, you probably will only get bloody.” Do your research and talk to your advisor but there probably are better investments elsewhere for the long-term.
Investors should conduct their own research and analysis before investing in any stocks, and consider a range of factors, including company fundamentals, industry trends, and economic conditions, before making any investment decisions. As the author notes, these stocks should be viewed as long-term investments, and investors should be prepared for potential volatility in the short term.
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