Faltering bank stocks raise deposit risk, and some offer bargains

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Bank stocks would look like the obvious bargain if not for the fact that they are issued by banks.

KBW Nasdaq Bank Index

Recently traded at levels not seen since 1998. Maybe it’s just a quarter century.

An exchange-traded fund that tracks an index

Invesco KBW Bank

(ticker: KBWB), is estimated to grow to seven times Ebacatp by 2023, or before analysts completely abandon their predictions.

Investors are jittery after two US bank failures and high-profile bailouts. Some money managers are warning followers that we are not safe yet. Tweeted, “The time is taking less for the fire to flare up.”

pershing square

CEO Bill Ackman last Thursday. I looked at this in the hope that it was a spa treatment or a dessert. Turns out it was a big fire.

Investors are particularly in mid-sized banks. “We think there is no good place for regional banks in the portfolio right now,” says Brad Neumann, director of market strategy at Money Manager Algiers.

A bank analyst points to a feedback loop between the volatility of share prices and the strength of the bank. “When people see stock prices fall, they get worried about their deposits,” says Konrad of Keefe, Bruyette & Woods.

On Wednesday, when UBS Group, the Swiss bank, began analyst coverage of US mid-cap bank stocks, it titled its report “No Man’s Land.” Unrelated to the report, shares of UBS Group (UBS) were falling at the time, dragged down by more dramatic declines for compatriots

credit suisse group


By now you’ve heard that the Silicon Valley bank, which spent four decades lending to venture capitalists and tech entrepreneurs, was brought down by windfall deposits in typically safe bonds but with dangerously long maturities. The idea was to get a little extra yield. When inflation roared and the Federal Reserve raised rates rapidly, the value of bonds plummeted.

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SVB planned to hold the bonds until maturity and collect full value, but was forced to sell them at a loss when deposits from technical customers dried up. Customers, many of them exceeding the limits of FDIC deposit protection, interpreted this as weakness, and demanded their funds. The bank closed in a little over a day. Panic ensued and Signature Bank soon failed.

Where were the early warning signs? Visually, they were on ticker scrolls and Twitter.

Shares of SVB Financial Group had been falling since October. In February, Byron Hobart, author of Diff, a widely followed newsletter on technology and finance, tweeted that SVB was “technically insolvent” if its bond values ​​were adjusted for unrealized losses, but also that “I don’t expect the bank to run,” given the remaining stock value. The stock value, of course, eventually evaporated, and the depositors followed.

Regulators quickly announced that SVB and Signature accounts would be covered in excess of the FDIC insurance limits. Also, banks can secure additional funds by using underwater bonds as collateral. It has triggered a lively debate on bailouts, moral hazards and needed reforms.

Meanwhile, Credit Suisse received a large central bank loan. And a slew of US lenders hoarded cash with First Republic Bank (FRC), whose shares declined. One of Ackman’s points is that regulators should extend broad protection to deposits of all sizes until a new plan is in place.

So back to the opening question: Are declining bank stocks an opportunity for stock market adventurers? On the one hand, panicked investors are piling into Treasuries, driving up prices there, which is helping to offset the kind of paper losses that plague SVB. On the other hand, the thought that falling bank stocks could set off a depositor doom loop adds a wrinkle to the buy-less math.

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Konrad at KBW, the firm for which the bank index is named, says niche banking has become risky. Part of the problem with SVB is that its depositors looked alike and tended to stick together. But many banks remain strong. Big banks are taking deposits from customers leaving out small banks.

Konrad points out that JPMorgan Chase (JPM) has cash on deposit with the Fed, which, on its own, would be comparable in size to one of the nation’s largest banks, and that JPM still offers a high return on capital. earns. Work. His favorite stocks now include US Bancorp (USB) for its fee income and diversified base, and Morgan Stanley (MS), which has a lucrative asset-management business.

Newman favors development shares in Algeria. Examples from other industries include CrowdStrike Holdings (CRWD), a cyber security company; Intuitive Surgical (ISRG), which makes medical robots; and Impinj (PI), which makes radio frequency tags for goods. When asked about banks, he says that big banks will continue to have an advantage over smaller banks because of their technology advantage, but he prefers payment networks and fintech companies.

UBS’s newly launched coverage of 19 mid-cap banks includes five buy ratings – the firm points out that this 26% favorable rate compares with one of 60% at its peers. Its highest convictions are Western Alliance Bancorp (WAL), New York Community Bancorp (NYCB) and Webster Financial (WBS). Its top-selling holdings are First Citizens Bankshare (FCNCA), Texas Capital Bankshare (TCBI), and Cullen/Frost Bankers (CFR).

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In general, UBS writes that banks look relative to earnings, but investors shouldn’t buy them for that reason alone, and deposit and loan performance is likely to be worse than the Street expects as the economy weakens.

Don’t put me down thanks to a high-stakes belief, with the option of converting to a vision later, contingent on stopping the fire that I had, of course, doubt.

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