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Regional Banks Continue to Bleed as Another Rate Hike Looms
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The current banking crisis is far from over. The KBW Nasdaq Bank Index was down 4.5% yesterday as the bank stocks continued to bleed amid investor concerns over the impact of future rate hikes on banks’ financials.
Excess of everything is bad. This holds true for U.S. regional banks in the current situation. For more than a year now, the Federal Reserve has been raising interest rates to control persistent inflation at the fastest pace not seen since the 1980s.
The Fed fund rates are now at a 15-year high of 4.75-5%. With the central bank expected to increase the rates by another 25 basis points at the end of the two-day FOMC meeting today, regional bank stocks will continue to feel the heat from higher rates.
We all know that banks benefit in a rising rate environment. But now, this has become a problem for banks, big or small. A host of issues, including potential recession, waning loan demand, rising funding costs, and high level of fixed-rate mortgage and commercial real estate loans, as well as uninsured deposits in the balance sheet, have turned the situation out of favor for banks.
In a normal situation, this rate increase would have been beneficial to banks’ net interest income and margin. But huge exposure to uninsured deposits and asset-liability mismatches are bigger concerns for banks like Western Alliance, PacWest, Comerica, KeyCorp and Zions. These banks witnessed heavy deposit outflows following the collapse of Signature Bank and Silicon Valley Bank in March.
Though the situation has stabilized somewhat, investors remain concerned about the stringent regulations that might come from the regulators following the three major bank failures in the last two months.
Over the past three months, shares of PACW, WAL, ZION, CMA and KEY have tanked substantially, as seen in the chart below:
Three-month Price Performance
Image Source: Zacks Investment Research
While the market participants expect the Fed to signal a pause after delivering another 25 bps rise in rates, the policymakers and investors are at odds over the rate trajectory going forward. The central bank is likely to indicate that rates will remain at a higher level through 2023, but investors are expecting a cut before the year ends.
But the financial tremors following the failure of First Republic might lead the Fed to change the course of the rate hike trajectory. Also, strong inflation reading and a robust job market indicating that the economy remains solid will likely lead the Fed to keep options open about future interest rate hikes.
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Regional Banks Continue to Bleed as Another Rate Hike Looms
The current banking crisis is far from over. The KBW Nasdaq Bank Index was down 4.5% yesterday as the bank stocks continued to bleed amid investor concerns over the impact of future rate hikes on banks’ financials.
Banks, including PacWest Bancorp , Western Alliance Bancorp (WAL - Free Report) , Zions (ZION - Free Report) , Comerica (CMA - Free Report) and KeyCorp (KEY - Free Report) , tanked between 10% and 30% on reignited concerns over the health of the banking system following the second largest bank failure a day earlier. On Monday, First Republic Bank became the third bank to collapse in the last two months and was acquired by JPMorgan.
Excess of everything is bad. This holds true for U.S. regional banks in the current situation. For more than a year now, the Federal Reserve has been raising interest rates to control persistent inflation at the fastest pace not seen since the 1980s.
The Fed fund rates are now at a 15-year high of 4.75-5%. With the central bank expected to increase the rates by another 25 basis points at the end of the two-day FOMC meeting today, regional bank stocks will continue to feel the heat from higher rates.
We all know that banks benefit in a rising rate environment. But now, this has become a problem for banks, big or small. A host of issues, including potential recession, waning loan demand, rising funding costs, and high level of fixed-rate mortgage and commercial real estate loans, as well as uninsured deposits in the balance sheet, have turned the situation out of favor for banks.
In a normal situation, this rate increase would have been beneficial to banks’ net interest income and margin. But huge exposure to uninsured deposits and asset-liability mismatches are bigger concerns for banks like Western Alliance, PacWest, Comerica, KeyCorp and Zions. These banks witnessed heavy deposit outflows following the collapse of Signature Bank and Silicon Valley Bank in March.
Though the situation has stabilized somewhat, investors remain concerned about the stringent regulations that might come from the regulators following the three major bank failures in the last two months.
Over the past three months, shares of PACW, WAL, ZION, CMA and KEY have tanked substantially, as seen in the chart below:
Three-month Price Performance
Image Source: Zacks Investment Research
While the market participants expect the Fed to signal a pause after delivering another 25 bps rise in rates, the policymakers and investors are at odds over the rate trajectory going forward. The central bank is likely to indicate that rates will remain at a higher level through 2023, but investors are expecting a cut before the year ends.
But the financial tremors following the failure of First Republic might lead the Fed to change the course of the rate hike trajectory. Also, strong inflation reading and a robust job market indicating that the economy remains solid will likely lead the Fed to keep options open about future interest rate hikes.