A customer enters Comerica Inc. Bank headquarters in Dallas, Texas.
Cooper Neill | Bloomberg | Getty Images
The stock sell-off that hit regional banks this year has exposed lenders including Zions and Comerica to the risk of being delisted from the Standard & Poor’s 500 index.
The banks, each with market capitalizations of around $5 billion, were the fourth- and sixth-smallest members of the 500 company listing as of this week, according to FactSet.
That leaves the companies in a similar position to Lincoln National, which got shunted from the S&P 500 last month and placed into a small-cap index. Blackstone, the world’s largest alternative asset manager, took Lincoln National’s spot.
This year’s regional banking crisis has already caused changes in the composition of the S&P 500, the most popular broad measure of large American companies in the investing world. Silicon Valley Bank and First Republic were removed from the benchmark after deposit runs led to their government seizure. More changes may be coming, especially if the industry faces a protracted slump, according to analysts.
“It’s absolutely a risk,” Chris Marinac, research director at Janney Montgomery Scott, said in an interview. “If the market were to further change the valuation of these companies, especially if we have higher rates, I wouldn’t rule it out.”
Banks begin disclosing third-quarter results Friday, led by JPMorgan Chase. Investors are keen to hear how rising interest rates affected bond holdings and deposits in the period.
Companies that no longer qualify as large-cap stocks are at heightened risk of demotion from the S&P 500. There were seven members valued at $6 billion or less at the end of August. Two of them were removed the following month: insurer Lincoln National and consumer firm Newell Brands.
Those that join the benchmark often celebrate the milestone. The popularity of mutual funds and ETFs based on the index means that new members typically see an immediate boost to their stock price. Those that get demoted can suffer declines as fewer money managers need to own shares in the companies.
To be considered for inclusion in the S&P 500, companies need to have a market capitalization of at least $14.5 billion and meet profitability and trading standards.
Members that violate “one or more of the eligibility criteria for the S&P Composite 1500 may be deleted from the respective component index at the Index Committee’s discretion,” according to S&P Dow Jones Indices’ methodology.
Still, that doesn’t mean Zions or Comerica are on the cusp of a delisting. The committee that decides the composition of the S&P 500 looks to minimize churn and accurately represent reference sectors, making changes only when “ongoing conditions warrant an index change,” according to S&P.
Shares of regional banks ZIons and Comerica have tumbled this year.
For instance, after the onset of the Covid pandemic in March 2020, many retail S&P 500 companies temporarily violated the profitability rule, but that didn’t result in widespread demotions, according to a person who has studied the S&P 500 index.
S&P Dow Jones Indices declined to comment for this article, as did Comerica. Zion’s didn’t immediately return a message seeking comment.
Besides Zions and Comerica, KeyCorp and Citizens Financial are the only other S&P 500 banks with market caps below the threshold for inclusion in the index, according to an Aug. 31 Piper Sandler note. KeyCorp and Citizens, however, each have market caps of greater than $10 billion, making them less likely to be impacted than smaller banks.
After Blackstone became the first major alternative asset manager to join the S&P 500 last month, analysts said that peers including KKR and Apollo Global may be next, and they would likely replace other financial names. KKR and Apollo each have market capitalizations of greater than $50 billion.
“Perhaps more demotions of low-market cap financials are to come,” Wells Fargo analyst Finian O’Shea said in a Sept. 5 research note.
Bob Diamond, Atlas Merchant Capital CEO, Former Barclays CEO, joins ‘Closing Bell Overtime’ to talk this week’s FOMC decision, what’s next for the central bank, the state of the economy and more.
Steve Eisman, the investor who called and profited from the subprime mortgage crisis, said Thursday that he’s staying away from bank stocks due to risks from crimped margins and tougher regulations. “I happen to think the whole bank sector is uninvestable,” Eisman, senior portfolio manager at Neuberger Berman, said on CNBC’s ” Squawk Box. ” The first reason for Eisman’s bearish thesis is the continuous deposit outflows. Uncertainty caused by the collapse of Silicon Valley Bank earlier this year triggered outflows at other regional banks and larger institutions. “The deposits in the banking industry is still $2 trillion above trend. It’s still going to come out … it’s going to come out faster. So the idea that that interest margins are gonna bottom anytime soon, I just think is wrong,” Eisman said. A bank’s net interest margin is a key figure for the industry, measuring the difference it pays account holders from what it earns making loans. With short-term rates spiking higher than long-term rates, bank margins have been hurt. Investors have been hoping that would change soon, but the so-called yield curve has stayed inverted despite the Federal Reserve’s best efforts. Banks are also feeling pressure to raise rates it pays on deposits in order to keep their depositors from jumping ship. The SPDR S & P Regional Banking ETF , which tracks 140 regional banks, has fallen more than 33% this year. Secondly, the widely followed investor said the new regulations in place to raise debt levels are not helping the situation. Last month, regulators unveiled plans to force American banks with at least $100 billion in assets to issue debt and bolster their so-called living wills, in a move to protect the public in the event of more failures. “The new regulations that have come out, to increase the amount of capital that the banks have, which I actually think is the wrong thing that the regulators are doing,” Eisman said. “They should be focusing on raising liquidity requirements by the mid cap and small cap banks but they’re doing the opposite.” Eisman shot to fame by betting against subprime mortgage loans before the 2008 financial crisis, as chronicled in Michael Lewis’ “The Big Short,” and the subsequent Oscar-winning movie based on the book. In terms of the areas he likes, the investor said he’s betting on infrastructure companies on the back of increased government spending. Eisman said these companies are specialized in road building, factory building, automation and reshoring.
Regional banking stocks are on pace for their worst year back to 2006, with the long tail of the SVB collapse. But bank stocks had been in rally mode since May, when First Republic was seized by the government and sold to JPMorgan, until bond rating agencies began issuing August warnings and downgrades.
Bloomberg | Bloomberg | Getty Images
Just how bad off are America’s banks, really?
Bond rating agencies trash-talked banks all through August, helping drive a near-6% drop in the S&P 500 during the month. But Wall Street equity analysts who cover banks argue that their counterparts on the bond side of the research profession, at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, got it wrong. They point to a period of rising bank stock prices before the bond ratings calls and better-than-expected earnings reports as evidence that things are better than the agencies think.
While the regional banking sector as tracked by the SPDR S&P Regional Banking Index is down nearly 25% year to date, according to Morningstar — and on pace for the worst year on record back to its inception in 2006, with the long tail of the SVB collapse hard to claw back gains from — bank stocks had been in rally mode from May to July. Regional bank stocks, in particular, gained as much as 35% before the bond warnings and downgrades began. Meanwhile, second-quarter bank earnings beat forecasts by 5%, according to Morgan Stanley.
The higher interest rates bond analysts cited hurt profits some, but most banks’ net interest income and margins were higher than a year before. Delinquencies on commercial real estate loans rose, but stayed well below 1% of loans at most institutions, with some of the banks singled out by bond rating agencies reporting no delinquencies at all. The ratings actions pushed the regional bank stock index 10% lower for the month-long period ending Sept. 8, according to Morningstar (the Moody’s bank warning was issued August 7).
At stake is not only what bank stocks may do next, but whether banks will be able to fill their role in providing credit to the rest of the economy, said Jill Cetina, associate managing director for U.S. banks at Moody’s. Their medium-term fate will have a lot to do with outside forces, from whether the Federal Reserve cuts interest rates next year to how fast the return-to-work push from employers in recent months gains momentum. Looming over all of this is the question of whether there will be a recession by early 2024 that worsens credit problems and cuts banks’ asset values, as Moody’s Investors Service expects.
“It’s reasonable to ask, is there a credit contraction in the banking sector?” Cetina said. She pointed to Federal Reserve surveys of bank lending officers that look like pre-recession measures in 2007 and 2000, with many banks raising credit prices and tightening lending standards. “Banks play a key role in shaping macroeconomic outcomes,” she said.
By any reckoning, the argument about banks is about two things: Interest rates and real estate, specifically office buildings. (Banks also call warehouses and apartment complexes commercial real estate, but their vacancy rates are not historically high). The arguments depend on two assumptions that markets believe less than they did earlier this year.
The bear case relies heavily on the prospect of a recession, which stock investors and economists think is much less likely than many believed six months ago. Goldman Sachs chief economist Jan Hatzius cut the firm’s estimated U.S. recession odds to 15% on Sept. 4, meaning the bank sees only a baseline risk of a downturn. At Moody’s, while the bond-rating arm expects a U.S. recession next year, the company’s economic consulting unit Moody’s Analytics doesn’t.
It also turns on an assumption of sustained high interest rates. While debate continues and the Fed’s own commentary continues to express a willingness to raise rates more, many investors now think the Fed will begin to trim the Fed funds rate by spring as inflation fades, according to CME Fedwatch. And while experts such as RXR Realty CEO Scott Rechler and billionaire real estate investor Jeff Greene believe office vacancies will stay high enough to force defaults by more developers, even as employers gain the upper hand against workers who want to continue to work from home, that didn’t show up in second–quarter bank earnings.
“I don’t necessarily think what they said is not true– it’s just less true than in May,” said CFRA Research bank stock analyst Alexander Yokum. “Expectations have improved over the last few months.”
March’s bank failures were about interest rates. The rise in rates since the Fed’s first post-Covid boost to the Fed funds rate in March 2022 had left banks with trillions of dollars of bonds written at lower rates before last year, whose value fell as rates rose. That opened precarious holes in the balance sheets of some banks, and fatal ones for banks that failed. Coupled with commercial real estate, higher funding costs create “layers” of risk going forward, Cetina said. “They’re both a problem, and they are happening at the same time,” she said.
The Fed stepped in with a short-term solution for banks’ funding issues, extending more than $100 billion in financing under a program called the Bank Term Funding Program, designed to help banks close the gap between the book value of their securities, mostly U.S. Treasuries, and their market value in a new, higher interest-rate market. That lets banks act as if their capital is not impaired, when it is, said veteran analyst and Fed critic Dick Bove of Odeon Capital.
“If the capital is not there, the bank can’t put more money out there” in loans, Bove said. “People say they understand that, but they don’t.”
Interest rate effects on bank profits
The jump in rates threatens the net interest income that is the source of bank profits and their long-term lending capacity, the bond rating agencies said. Indeed, interest income fell at most banks in the second quarter – compared to the first quarter – and Yokum says it will fall more in the third quarter. So did net interest margin – the difference between the rates banks pay for funds, usually deposits, and what they collect on loans and other assets.
But the drops were small enough that banks made up the lost income elsewhere. The average regional bank stock rose 8% after earnings, Morgan Stanley said, with banks beating profit forecasts by an average of 5%. Most banks reported before the bond agencies acted.
Bulls point out that while interest rates began to bite at bank profits in the second quarter, the impact so far has been minor for most, and several banks said that higher interest rates have boosted profits over the past year. At most banks, both net interest income and net interest margins did better in the second quarter than in the second quarter of 2022, making rising rates helpful to bank profits overall. Morgan Stanley analysts Manan Gosalia and Betsy Graseck said most banks, even regional banks thought to be most vulnerable to depositors fleeing as rates rise, also added deposits in the quarter. That stems fears they would boost rates sharply to keep customers.
Not all banks felt much pressure on deposit rates: Wells Fargo said its average was 1.13% in the second quarter; at Bank of America it was just 1.24%.
Credit quality is on the decline
Credit quality is getting a little worse, but still better than pre-pandemic levels at most institutions, Yokum said. Even the office sector still is showing few signs of serious problems. Moody’s calls banks’ current credit quality “solid but unsustainable.”
Valley has $50 billion in loans on its balance sheet, and $27.8 billion of them are in commercial real estate, according to the bank, a much higher proportion than the 7% at Bank of America. But only 10% of Valley’s commercial real estate loans, less than 6% of its total loans, are to office buildings.
Valley has had stumbles in office lending, to be sure. It disclosed that its total non-performing assets were $256 million at the end of June. But that remains only about half of 1% of its total loan book. Chargeoffs of loans the bank thinks won’t be fully repaid fell in the quarter, and the company’s $460 million in loan loss reserves is nearly double the amount of all its troubled loans.
Similarly, Zions’ $2 billion office portfolio, part of a commercial real estate exposure that is more than a quarter of the bank’s assets, doesn’t have a single delinquent loan, according to the bank’s second-quarter report. Neither did Commerce.
“Zions’ chargeoffs were .09 of 1% of total assets,” said Yokum, who doesn’t follow Commerce or Valley. “Not alarming.”
Many banks argue that bears overstate real-estate lending problems by overlooking how few of their real estate loans are to office buildings. With hotel and warehouse occupancy high, they’re selling the idea that only their office portfolio is at serious risk, and that the office loans are too small to threaten banks’ health. At KeyCorp, whose shares have dropped 36% this year and which S&P downgraded, office loans are 0.8% of the bank’s total.
Bank delinquencies rose in the last quarter, but remain lower than a year ago.
“We have limited office exposure with … almost no delinquencies,” Fifth Third Bancorp chief financial officer James Leonard said on the bank’s earnings call. “We continue to watch office closely and believe the overall impact on Fifth Third will be limited.”
Two big questions about banks finding a bottom
There are two big unanswered questions about banks and real estate. Eight months into a year where nearly a quarter of office building mortgages are expected to mature and need refinancing at today’s higher rates, chargeoffs — while getting more common — are still less than 1% of loans at nearly every major bank. Is a surge coming, or are banks delaying a reckoning with short-term financing, hoping for rates to fall or occupancy to rise?
And, when will more workers go back to the office, relieving pressure on companies to stop paying for space they don’t really use?
The share of U.S. workers working from home at least part of the week has stabilized at around 20-25%, below its peak of 47% in 2021 but well above the pre-pandemic 2.6%, Goldman’s Hatzius wrote in an Aug. 28 report. With CEOs as prominent as Amazon’s Andy Jassy becoming more forceful about return to office, Goldman says online job postings are down to only 15% of new positions allowing work from home. Even Zoom Communications, maker of video-conferencing software, is making staffers return to the office two days a week. Hatzius estimates remaining part-time WFH will add 3 percentage points to office building vacancy rates by 2030. But that impact will be lessened by a near-halting in new construction, he wrote.
Findings like these have some market players speculating that a bottom may be near.
Manhattan real estate attorney Trevor Adler says he’s seeing an uptick, with public sector tenants like Empire State Development signing long-term leases. ESD took 117,000 square feet in Midtown in July, he said.
“To have that kind of deal in July is not typical,” said Adler, a partner at Stroock & Stroock & Lavan. “That work is keeping me busy, educational, hospital and charity.”
Others argue that the slow rate of foreclosures is normal early in what they believe is a long-term crisis.
“Crises happen slowly, then all at once,” said Ben Miller, CEO of Washington-based Fundrise, an online platform for real estate investment, pointing out that several years elapsed between early warnings and the depth of the late-2000s home mortgage crisis.
Banks have been encouraged by the Fed and other bank regulators to give previously-solvent borrowers extensions or other workouts, Miller said. Regulators argue that this guidance, released in June, simply restated previous policy.
The primary way the Fed can defuse upcoming foreclosures is to lower rates, so developers can refinance office buildings and stay profitable, Miller said.
“If we end up higher for longer, the banks have a huge problem,” Miller said. “If high rates are transitory, it gets the bank to a normalized rate environment and there’s no problem.”
Officials at the Fed declined comment.
The takeaway may be that banks’ problems are big enough to contain earnings for a few quarters, while not threatening their solvency, Yokum said. At Standard & Poor’s, analysts emphasized that 90% of U.S. banks have stable outlooks, even as it downgraded five banks. “Stability in the U.S. banking sector has improved significantly in recent months,” analysts led by Brendan Browne wrote.
“I do expect net interest margins to fall in the third quarter, and for credit quality to get worse, but I expect them both to be manageable,” Yokum said. “And both are well built into the stock prices.”
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Beset by worries Major U.S. indexes tumbled, weighed down by losses in financial stocks and worries over China’s faltering economy. Asia-Pacific markets followed Wall Street and fell Wednesday. Most regional indexes lost at least 1%. A silver lining: Japanese business’ sentiment climbed in July, alongside the country’s stronger-than-expected economic growth.
Potential banking downgrade Fitch Ratings warned it may downgrade the U.S. banking industry’s credit rating from AA- to A+. Since individual banks cannot be rated higher than the industry, major banks like JPMorgan Chase and Bank of America would be cut to an A+ rating — with a trickle-down effect for smaller banks — if the downgrades happens. Fitch’s warning comes as Moody’s downgraded 10 banks last week.
Higher risk of corporate defaults There’s a higher chance corporate debt in emerging markets might default, according to JPMorgan. The bank raised its forecast for high-yield defaults in Asia from 4.1% to 10% — but that figure drops to just 1% if China property is excluded. That’s a sign of how severe the contagion risk is if Country Garden, the beleaguered Chinese property developer, defaults.
U.S. consumer strong as ever U.S. consumer spending in July remained healthy, according to data from the Commerce Department. Seasonally adjusted retail sales rose 0.7% for the month; economists were expecting 0.4%. Excluding autos, sales rose 1% against a 0.4% forecast. Both figures were the best monthly gains since January, reinforcing sentiment that the consumer can continue supporting economic growth.
[PRO] Stocks are still ‘overvalued’ Despite the sell-off in stocks the last two weeks, U.S. markets have rallied so much this year that stocks are still “overvalued and overextended,” according to Morningstar’s chief U.S. market strategist. It’s a good time to sell these six stocks to lock in profits — and buy five cheap ones, he said.
After Fitch warned that it might downgrade the banking industry’s credit rating, shares of big U.S. banks fell. Bank of America lost 3.2%, JPMorgan declined 2.55% and Wells Fargo slid 2.31%.
Regional banks weren’t spared the slaughter, either. The SPDR S&P Regional Banking ETF fell 3.33% after Minneapolis Federal Reserve President Neel Kashkari spoke in favor of “significantly further” capital requirements for banks with more than $100 billion in assets. Kashkari also emphasized that if inflation rebounds, rates might have to go higher and “pressures [in regional banks] could flare up again.”
But not everyone’s worried about Fitch’s warning. “The U.S. bank system is overall sound,” said Eric Diton, president and managing director at The Wealth Alliance.
“All Fitch was saying was: ‘If we did downgrade the sector again, that would lead us to have to downgrade a lot of the individual banks,’” Diton said. “Maybe they will, maybe they won’t.”
Banking doldrums aside, there were two bright spots in the initial public offering arena. Shares of VinFast, a Vietnamese electric vehicle company, surged from $10 per share to $22 in its debut on the Nasdaq; prices continued rising throughout the day to close at $37.
Meanwhile, Cava shares jumped 9.44% in extended trading after its first earnings report since its IPO in June. Taken together, they suggest that the IPO market is returning to health.
Still, major indexes couldn’t shrug off worries over banks and China. The S&P 500 slipped 1.16%, ending the day below its 50-day moving average for the first time since March — possibly heralding the start of a continued slide. The Dow Jones Industrial Average lost 1.02%, breaking its three-day winning streak. The Nasdaq Composite fell 1.14%.
If indexes continue sliding, that’d be their third consecutive losing week. Investors are hoping it’s a brief summer spell, a moment of correction that will end as the weather turns.
A woman walks past JPMorgan Chase & Co’s international headquarters on Park Avenue in New York.
Andrew Burton | Reuters
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Beset by worries Major U.S. indexes tumbled, weighed down by losses in financial stocks and worries over China’s faltering economy. European markets mostly fell as well. The pan-European Stoxx 600 index lost 0.93%, but Italy’s FTSE MIB added 0.57% — the only major bourse to end the day in the green.
Potential banking downgrade Fitch Ratings warned it may downgrade the U.S. banking industry’s credit rating from AA- to A+. Since individual banks cannot be rated higher than the industry, major banks like JPMorgan Chase and Bank of America would be cut to an A+ rating — with a trickle-down effect for smaller banks — if the downgrades happens. Fitch’s warning comes as Moody’s downgraded 10 banks last week.
U.S. consumer strong as ever U.S. consumer spending in July remained healthy, according to data from the Commerce Department. Seasonally adjusted retail sales rose 0.7% for the month; economists were expecting 0.4%. Excluding autos, sales rose 1% against a 0.4% forecast. Both figures were the best monthly gains since January, reinforcing sentiment that the consumer can continue supporting economic growth.
Rate hike to strengthen ruble Russia’s central bank jacked up interest rates by 3.5 percentage points to 12% at an emergency meeting Tuesday. The bank’s attempting to stop a sudden slide in the Russian ruble, which slumped to nearly 102 against the U.S. dollar Monday. The ruble has since climbed back to around 98.5 as of publication time.
[PRO] Overconfident investors The stock market rally during the first half of this year has made investors overconfident, according to a Bank of America survey. That’s bad — because the “strong tailwind” propelling stocks forwards is fading fast, a BofA analyst wrote in a summary of the survey.
After Fitch warned that it might downgrade the banking industry’s credit rating, shares of big U.S. banks fell. Bank of America lost 3.2%, JPMorgan declined 2.55% and Wells Fargo slid 2.31%.
Regional banks weren’t spared the slaughter, either. The SPDR S&P Regional Banking ETF fell 3.33% after Minneapolis Federal Reserve President Neel Kashkari spoke in favor of “significantly further” capital requirements for banks with more than $100 billion in assets. Kashkari also emphasized that if inflation rebounds, rates might have to go higher and “pressures [in regional banks] could flare up again.”
But not everyone’s worried about Fitch’s warning. “The U.S. bank system is overall sound,” said Eric Diton, president and managing director at The Wealth Alliance.
“All Fitch was saying was: ‘If we did downgrade the sector again, that would lead us to have to downgrade a lot of the individual banks,'” Diton said. “Maybe they will, maybe they won’t.”
Banking doldrums aside, there were two bright spots in the initial public offering arena. Shares of VinFast, a Vietnamese electric vehicle company, surged from $10 per share to $22 in its debut on the Nasdaq; prices continued rising throughout the day to close at $37.
Meanwhile, Cava shares jumped around 8% in extended trading after its first earnings report since its IPO in June. Taken together, they suggest that the IPO market is returning to health.
Still, major indexes couldn’t shrug off worries over banks and China. The S&P 500 slipped 1.16%, ending the day below its 50-day moving average for the first time since March — possibly heralding the start of a continued slide. The Dow Jones Industrial Average lost 1.02%, breaking its three-day winning streak. The Nasdaq Composite fell 1.14%.
If indexes continue sliding, that’d be their third consecutive losing week. Investors are hoping it’s a brief summer spell, a moment of correction that will end as the weather turns.
Neel Kashkari, President and CEO of the Federal Reserve Bank of Minneapolis, speaks during an interview with Reuters in New York City, New York, May 22, 2023.
Mike Segar | Reuters
Minneapolis Federal Reserve President Neel Kashkari favors getting tougher on regional banks, following a crisis earlier this year that he said may not be over.
Asked during a town hall whether he agrees with proposals setting higher capital requirements for banks with more than $100 billion in assets, the central bank official said, “My own personal opinion is it doesn’t go far enough. I think it’s a step in the right direction, but I would like to go significantly further.”
The architect of the Troubled Asset Relief Program that helped bail out banks during the 2008 financial crisis, Kashkari said that if the Fed has to keep raising interest rates, it could cause more problems for smaller banks.
At the root of the crisis was duration risk. A crisis of confidence forced some banks to liquidate assets to meet withdrawal demand. Those banks holding longer-dated Treasurys faced capital losses as rates went up and bond prices fell.
Should the Fed have to keep raising rates, that could affect banks in the same situation. Kashkari did not indicate if he thought the Fed was positioned for more rate hikes, but he noted that “we’re a long way away from cutting rates.”
“Right now it seems like things are quite stable, that banks have gotten through this reasonably well,” he said. “Now, the risk is that if inflation is not completely under control, and that we have to raise rates further from here, to bring it down, that they might face more losses than they currently face today. And these pressures could flare up again in the future.”
Referring to the issues in March that took down Silicon Valley Bank and others, Kashkari replied “all of the above” when asked whether it was higher interest rates or bank mismanagement that caused the failures.
The Fed does not make bank regulatory policy but rather is called on to enforce it.
A report prepared earlier this year by Michael Barr, the Fed’s vice chair for supervision, noted management failures in the collapse of Silicon Valley Bank while also noting supervisory lapses.
Charles Dallara, Former Institute of International Finance CEO, joins ‘Closing Bell Overtime’ to talk new banking regulations, banking consolidation and more.
Mark Avallone, president of Potomac Wealth Advisors, and Jeff Kilburg, CEO of KKM Financial, join ‘The Exchange’ to discuss stocks falling after the Moody’s downgrade, the case for buying regional banks, consolidation in the VIX and owning tech in an equal weighted manner.
Mark Avallone, president of Potomac Wealth Advisors, and Jeff Kilburg, CEO of KKM Financial, join ‘The Exchange’ to discuss stocks falling after the Moody’s downgrade, the case for buying regional banks, consolidation in the VIX and owning tech in an equal weighted manner.
Greg Friedman, Peachtree CEO, joins ‘The Exchange’ to discuss a rising trend in commercial real estate private credit loans, and how private creditors can benefit from the pullback in direct bank lending to commercial real estate.
Josh Brown, Bryn Talkington, Stephanie Link, and Sarat Sethi join ‘Halftime Report’ to discuss Moody’s credit rating cut, long term investment opportunities in financials and regional banks struggling to grow lending.
A PNC Bank branch in New York, on Wednesday, Jan. 18, 2023.
Bing Guan | Bloomberg | Getty Images
Investors dumped shares of regional bank stocks on Tuesday after Moody’s made changes to the credit outlook for more than two dozen banks across the group, putting the sector on track for its worst day since May.
Moody’s downgraded the credit of 10 small regional banks by one notch apiece, while 17 other banks were either given negative outlook or had their rating put under review.
In a note, Moody’s cited many of the concerns around interest rate risk that led to the collapse of several regional banks earlier this year.
“US banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets. Meanwhile, many banks’ Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital,” the Moody’s note said.
The declines dragged down the SPDR S&P Regional Banking ETF (KRE) by about 3.5%. That puts the fund on track for its worst day since May 4, when the fund fell nearly 5.5%.
The KRE ETF was suffering one of its worst days in months on Tuesday.
