The
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“There’s a general concern … that we’re in a credit cycle,” said Chris Marinac, an analyst at Janney Montgomery Scott, pointing to investor worries that “every bank is going to have some type of problem as we move into the rest of 2024 and 2025.”
The last 12 months haven’t been fun for the regional banking sector. Some midsize lenders are still limping —
Higher interest rates are continuing to hit regional banks hard. Yes, they’re making more money on interest collected from borrowers, but their once-indifferent depositors have
At the same time, regional banks’ real estate-heavy portfolios remain a headline-grabbing worry. Some office and multifamily buildings are doing just fine, but investors worry that certain banks may need to absorb heavy losses on those that are struggling.
New York Community, which has a
Executives at other banks are quick to point out that New York Community’s issues are idiosyncratic and that their own loan books are more diversified. New Jersey-based Valley National Bancorp
But investors’ approach is to “shoot first, ask questions later,” said Scott Siefers, an analyst at Piper Sandler. Many investors sold their positions in regional bank stocks right after SVB’s failure on March 10, 2023. And despite bankers’ assurances, they haven’t gotten the all-clear to come back.
Plus, with the broader stock market continuing to rip, there are other sectors such as technology that “you feel a lot more confident in,” said Jean Rosenbaum, senior portfolio manager at GYL Financial Synergies.
That skepticism has left regional bank stocks stuck in the mud, even if they’ve clawed their way out of their lows last spring. The KBW Nasdaq Regional Banking index is now slightly down from a year ago, having rebounded after falling close to 30% last spring.
Compare that with JPMorgan, which is up 44% after a year in which its dominance became clear. CEO Jamie Dimon
Shares in Bank of America, whose investments in low-yielding bonds
To Bill Demchak, the CEO of Pittsburgh-based PNC Financial Services Group, the last year showed the benefits of the big banks’ scale.
As a super-regional bank with $562 billion in assets, PNC has
But the deposit growth was far bigger at the megabanks, Demchak said
In reference to JPMorgan and Bank of America, Demchak said: “They grow a PNC every five years.”
Scale and density “matter more than ever before,” Demchak wrote earlier this month in his annual letter to shareholders. He indicated that the Pittsburgh-based bank is eyeing potential “acquisition opportunities” that would make PNC bigger.
The prospect of getting big bank deals done is murky, given the skepticism from Biden administration regulators about consolidation. But mergers would help banks get the scale needed to compete “in an increasingly digital economy,” said Yang Tang, who formerly advised banks on balance sheet strategies and is now CEO at Arch Indices.
In addition to a national footprint, bank clients want a seamless digital experience with a variety of money-management tools — a costly proposition for the average regional bank. Tang said the highly regulated environment makes building a banking app an “extremely costly endeavor,” alongside the rising cost of growing and keeping deposits.
Over the past year, funding loans became even more expensive. Rising rates had already been prompting bank customers to seek more bang from their buck in higher-interest accounts, but the regional bank failures accelerated this deposit flight.
The competition for deposits seems to be easing, but only after a tough battle last year that raised banks’ interest expenses. They’ve been paying rates on certificates of deposit
In contrast with the rest of the industry, the megabanks
So, with a more diverse set of revenue streams, high interest rates haven’t been as much of a profitability hurdle for the big banks.
Bankers
“That’s going to be a bit of a pain point,” Tang said.
Interest rates staying relatively high also means the commercial real estate market won’t get as much of a breather as bankers had hoped. High interest rates have sharply cut the values of commercial properties, adding onto broader hurdles for apartment buildings in certain areas and for offices hit hard by the COVID-driven rise in remote work.
Richard Saperstein, chief investment officer at investment management firm Treasury Partners, doesn’t see a systemic risk for regional banks. He says that lending standards have gotten tighter than they were in 2008.
Still, he said that regional banks face the brunt of the risks in commercial real estate lending, since they shoulder a higher proportion of those loans than the megabanks. Bankers, analysts and investors say that any losses will be highly nuanced, depending on trends in specific cities and issues at weaker properties. The pain may also be more gradual than sudden since the renewal terms on leases are staggered.
“It’s likely to be a slow burn,” Saperstein said, noting that it’s “important to dig down and look at the composition” of each bank’s real estate portfolio.
In the meantime, the investors who are left in the regional bank sector
“There are investors who are going to pounce on any signs of weakness, and banks have to be ready to defend,” Marinac said. “I think New York Community was ready to defend.”