A customer enters Comerica Inc. Bank headquarters in Dallas, Texas.
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A trio of regional banks face increasing pressure on returns and profitability that makes them potential targets for acquisition by a larger rival, according to KBW analysts.
Banks with between $80 billion and $120 billion in assets are in a tough spot, says Christopher McGratty of KBW. That’s because this group has the lowest structural returns among banks with at least $10 billion in assets, putting them in the position of needing to grow larger to help pay for coming regulations — or struggling for years.
Of eight banks in that zone, Comerica, Zions and First Horizon might ultimately be acquired by more profitable competitors, McGratty said in a Nov. 19 research note.
Zions and First Horizon declined comment. Comerica didn’t immediately have a response to this article.
While two others in the cohort, Western Alliance and Webster Financial, have “earned the right to remain independent” with above-peer returns, they could also consider selling themselves, the analyst said.
The remaining lenders, including East West Bank, Popular Bank and New York Community Bank each have higher returns and could end up as acquirers rather than targets. KBW estimated banks’ long-term returns including the impact of coming regulations.
“Our analysis leads us to these conclusions,” McGratty said in an interview last week. “Not every bank is as profitable as others and there are scale demands you have to keep in mind.”
Banking regulators have proposed a sweeping set of changes after higher interest rates and deposit runs triggered the collapse of three midsized banks this year. The moves broadly take measures that applied to the biggest global banks down to the level of institutions with at least $100 billion in assets, increasing their compliance and funding costs.
Invesco KBW Regional Bank ETF
While shares of regional banks have dropped 21% this year, per the KBW Regional Banking Index, they have climbed in recent weeks as concerns around inflation have abated. The sector is still weighed down by concerns over the impact of new rules and the risk of a recession on loan losses, particularly in commercial real estate.
Given the new rules, banks will eventually cluster in three groups to optimize their profitability, according to the KBW analysis: above $120 billion in assets, $50 to $80 billion in assets, and $20 to $50 billion in assets. Banks smaller than $10 billion in assets have advantages tied to debit card revenue, meaning that smaller institutions should grow to at least $20 billion in assets to offset their loss.
The problem for banks with $80 billion to $90 billion in assets like Zions and Comerica is that the market assumes they will soon face the burdens of being $100 billion-asset banks, compressing their valuations, McGratty said.
On the other hand, larger banks with strong returns including Huntington, Fifth Third, M&T and Regions Financial are positioned to grow through acquiring smaller lenders, McGratty said.
While others were more bullish, KBW analysts downgraded the U.S. banking industry in late 2022, months before the regional banking crisis. KBW is also known for helping determine the composition of indexes that track the banking industry.
Banks are waiting for clarity on regulations and interest rates before they will pursue deals, but consolidation has been a consistent theme for the industry, McGratty said.
“We’ve seen it throughout banking history; when there’s lines in the sand around certain sizes of assets, banks figure out the rules,” he said. “There’s still too many banks and they can be more successful if they build scale.”
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.
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.”
The whirlwind weekend in late April that saw the country’s biggest bank take over its most troubled regional lender marked the end of one wave of problems — and the start of another.
After emerging with the winning bid for First Republic, a lender to rich coastal families that had $229 billion in assets, JPMorgan Chase CEO Jamie Dimon delivered the soothing words craved by investors after weeks of stomach-churning volatility: “This part of the crisis is over.”
But even as the dust settles from a string of government seizures of failed midsized banks, the forces that sparked the regional banking crisis in March are still at play.
Rising interest rates will deepen losses on securities held by banks and motivate savers to pull cash from accounts, squeezing the main way these companies make money. Losses on commercial real estate and other loans have just begun to register for banks, further shrinking their bottom lines. Regulators will turn their sights on midsized institutions after the collapse of Silicon Valley Bank exposed supervisory lapses.
What is coming will likely be the most significant shift in the American banking landscape since the 2008 financial crisis. Many of the country’s 4,672 lenders will be forced into the arms of stronger banks over the next few years, either by market forces or regulators, according to a dozen executives, advisors and investment bankers who spoke with CNBC.
“You’re going to have a massive wave of M&A among smaller banks because they need to get bigger,” said the co-president of a top six U.S. bank who declined to be identified speaking candidly about industry consolidation. “We’re the only country in the world that has this many banks.”
To understand the roots of the regional bank crisis, it helps to look back to the turmoil of 2008, caused by irresponsible lending that fueled a housing bubble whose collapse nearly toppled the global economy.
The aftermath of that earlier crisis brought scrutiny on the world’s biggest banks, which needed bailouts to avert disaster. As a result, it was ultimately institutions with $250 billion or more in assets that saw the most changes, including annual stress tests and stiffer rules governing how much loss-absorbing capital they had to keep on their balance sheets.
Non-giant banks, meanwhile, were viewed as safer and skirted by with less federal oversight. In the years after 2008, regional and small banks often traded for a premium to their bigger peers, and banks that showed steady growth by catering to wealthy homeowners or startup investors, like First Republic and SVB, were rewarded with rising stock prices. But while they were less complex than the giant banks, they were not necessarily less risky.
The sudden collapse of SVB in March showed how quickly a bank could unravel, dispelling one of the core assumptions of the industry: the so-called stickiness of deposits. Low interest rates and bond-purchasing programs that defined the post-2008 years flooded banks with a cheap source of funding and lulled depositors into leaving cash parked at accounts that paid negligible rates.
“For at least 15 years, banks have been awash in deposits and with low rates, it cost them nothing,” said Brian Graham, a banking veteran and co-founder of advisory firm Klaros Group. “That’s clearly changed.”
After 10 straight rate hikes and with banks making headline news again this year, depositors have moved funds in search of higher yields or greater perceived safety. Now it’s the too-big to-fail-banks, with their implicit government backstop, that are seen as the safest places to park money. Big bank stocks have outperformed regionals. JPMorgan shares are up 7.6% this year, while the KBW Regional Banking Index is down more than 20%.
That illustrates one of the lessons of March’s tumult. Online tools have made moving money easier, and social media platforms have led to coordinated fears over lenders. Deposits that in the past were considered “sticky,” or unlikely to move, have suddenly become slippery. The industry’s funding is more expensive as a result, especially for smaller banks with a higher percentage of uninsured deposits. But even the megabanks have been forced to pay higher rates to retain deposits.
Some of those pressures will be visible as regional banks disclose second-quarter results this month. Banks including Zions and KeyCorptold investors last month that interest revenue was coming in lower than expected, and Deutsche Bank analyst Matt O’Connor warned that regional banks may begin slashing dividend payouts.
JPMorgan kicks off bank earnings Friday.
“The fundamental issue with the regional banking system is the underlying business model is under stress,” said incoming Lazard CEO Peter Orszag. “Some of these banks will survive by being the buyer rather than the target. We could see over time fewer, larger regionals.”
Compounding the industry’s dilemma is the expectation that regulators will tighten oversight of banks, particularly those in the $100 billion to $250 billion asset range, which is where First Republic and SVB slotted.
“There’s going to be a lot more costs coming down the pipe that’s going to depress returns and pressure earnings,” said Chris Wolfe, a Fitch banking analyst who previously worked at the Federal Reserve Bank of New York.
“Higher fixed costs require greater scale, whether you’re in steel manufacturing or banking,” he said. “The incentives for banks to get bigger have just gone up materially.”
Half of the country’s banks will likely be swallowed by competitors in the next decade, said Wolfe.
While SVB and First Republic saw the greatest exodus of deposits in March, other banks were wounded in that chaotic period, according to a top investment banker who advises financial institutions. Most banks saw a drop in first-quarter deposits below about 10%, but those that lost more than that may be troubled, the banker said.
“If you happen to be one of the banks that lost 10% to 20% of deposits, you’ve got problems,” said the banker, who declined to be identified speaking about potential clients. “You’ve got to either go raise capital and bleed your balance sheet or you’ve got to sell yourself” to alleviate the pressure.
A third option is to simply wait until the bonds that are underwater eventually mature and roll off banks’ balance sheets – or until falling interest rates ease the losses.
But that could take years to play out, and it exposes banks to the risk that something else goes wrong, such as rising defaults on office loans. That could put some banks into a precarious position of not having enough capital.
In the meantime, banks are already seeking to unload assets and businesses to boost capital, according to another veteran financials banker and former Goldman Sachs partner. They are weighing sales of payments, asset management and fintech operations, this banker said.
“A fair number of them are looking at their balance sheet and trying to figure out, `What do I have that I can sell and get an attractive price for’?” the banker said.
Banks are in a bind, however, because the market isn’t open for fresh sales of lenders’ stock, despite their depressed valuations, according to Lazard’s Orszag. Institutional investors are staying away because further rate increases could cause another leg down for the sector, he said.
Orszag referred to the last few weeks as a “false calm” that could be shattered when banks post second-quarter results. The industry still faces the risk that the negative feedback loop of falling stock prices and deposit runs could return, he said.
“All you need is one or two banks to say, ‘Deposits are down another 20%’ and all of a sudden, you will be back to similar scenarios,” Orszag said. “Pounding on equity prices, which then feeds into deposit flight, which then feeds back on the equity prices.”
It will take perhaps a year or longer for mergers to ramp up, multiple bankers said. That’s because acquirers would absorb hits to their own capital when taking over competitors with underwater bonds. Executives are also looking for the “all clear” signal from regulators on consolidation after several deals have been scuttled in recent years.
While Treasury Secretary Janet Yellen has signaled an openness to bank mergers, recent remarks from the Justice Department indicate greater deal scrutiny on antitrust concerns, and influential lawmakers including Sen. Elizabeth Warren oppose more banking consolidation.
When the logjam does break, deals will likely cluster in several brackets as banks seek to optimize their size in the new regime.
Banks that once benefited from being below $250 billion in assets may find those advantages gone, leading to more deals among midsized lenders. Other deals will create bulked-up entities below the $100 billion and $10 billion asset levels, which are likely regulatory thresholds, according to Klaros co-founder Graham.
Bigger banks have more resources to adhere to coming regulations and consumers’ technology demands, advantages that have helped financial giants including JPMorgan steadily grow earnings despite higher capital requirements. Still, the process isn’t likely to be a comfortable one for sellers.
But distress for one bank means opportunity for another. Amalgamated Bank, a New York-based institution with $7.8 billion in assets that caters to unions and nonprofits, will consider acquisitions after its stock price recovers, according to CFO Jason Darby.
“Once our currency returns to a place where we feel it’s more appropriate, we’ll take a look at our ability to roll up,” Darby said. “I do think you’ll see more and more banks raising their hands and saying, `We’re looking for strategic partners’ as the future unfolds.”
Michael Hsu, Acting Comptroller of the Currency, joins ‘Closing Bell Overtime’ to discuss testifying in front of congress, the regional banking sector, and more.
A pedestrian walks past a Pacific Western Bank branch in Beverly Hills, California on May 4, 2023.
Patrick T. Fallon | Afp | Getty Images
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Upbeat economic data couldn’t overcome the resistance stocks faced from disappointing corporate performance and persistent banking fears.
PacWest shares sank 22.7% after the bank said in a securities filing Thursday that its deposits dropped 9.5% last week, following media reports that the regional bank was “evaluat[ing] all options.” Seeking to head off contagion fears, Western Alliance said its deposits have increased by $600 million since May 2. Western Alliance shares fell 0.77%.
Elon Musk said he is stepping down as Twitter CEO and will oversee product and software. Twitter will get a new CEO, an unnamed woman, in six weeks. Tesla (not Twitter!) shares jumped 2.1% on the news, suggesting investors of Musk’s other company were pleased — or just relieved.
U.S. stocks traded mixed Thursday as markets were rocked by losses in Disney shares and pressure around regional banks. Asia-Pacific markets were mostly lower Friday. Taiwan’s TWII Index was unchanged even as Foxconn saw its first-quarter net profit slump 56% to 12.83 billion Taiwanese dollars ($417.2 million). Shares of the company, also known as Hon Hai Precision Industry, dropped 2.4%
The debt ceiling meeting between President Joe Biden and other leaders, scheduled Friday, has been postponed until next week, CNBC learned. But that’s a good thing because it allows lawmakers’ staffs, who are holding their own conversations, to make more progress before the big names are back in the same room, a source told NBC News.
PRO This chipmaker could hit more than $1 billion in revenue if things go well, according to Morgan Stanley. “Higher price points plus supply chain commentary is pointing to an opportunity that is multiples of our initial target,” wrote analyst Joseph Moore in a note to clients.
Upbeat economic data couldn’t overcome the resistance stocks faced from disappointing corporate performance and persistent banking fears.
First, the promising news (at least when it comes to inflation). April’s wholesale prices in the U.S. rose 0.2% for the month, less than the Dow Jones estimate of 0.3%. That translates to a 2.3% year-over-year increase, down from March’s 2.7% and the lowest since January 2021. In another sign inflation might be coming under control, initial jobless claims increased by 22,000 to 264,000 for the week ended May 6, according to the Department of Labor. That’s the highest reading since Oct. 30, 2021.
But that news didn’t shield markets from other fears. “Investor focus is now on both the economic backdrop and liquidity and what’s going on versus rates and inflation,” said Dylan Kremer, co-chief investment officer of Certuity.
And liquidity — or, in other words, the health of banks and their willingness or ability to make loans — was in focus again Thursday. PacWest shares tumbled, along with other regional banks like Zions Bancorp, which lost 4.5%, and KeyCorp, which fell 2.5%. The SPDR S&P Regional Banking ETF slid 2.5% Thursday.
Another big loser on Thursday was Disney, which sank 8.7% after the media giant reported it had lost subscribers from its Disney+ streaming service. That’s the largest one-day fall, in percentage terms, since Nov. 9, when the company slumped 13%.
Disney’s shares dragged down both the S&P 500, which declined 0.17%, and the Dow Jones Industrial Average, which slid 0.66%. However, the Nasdaq Composite managed to add 0.18%. The tech-heavy index was boosted by a 4.3% jump in Alphabet shares, which are trading at their highest level since August, thanks to investors’ optimism around the artificial intelligence products the tech giant announced at its annual developers conference.
After a heavy week of economic data releases, investor focus will turn to the looming debt ceiling in the U.S. Unease over a potential sovereign default has already spread through markets. For instance, yields for short-term T-bills have jumped sharply this month. Still, most economists and bankers — including JPMorgan Chase CEO Jamie Dimon — expect the U.S. to avoid defaulting. If they’re proven wrong, the results could, in Dimon’s words, be “potentially catastrophic.”
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In an aerial view, a Pacific Western Bank building is seen on May 4, 2023 in Los Angeles, California.
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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.
Upbeat economic data couldn’t overcome the resistance stocks faced from disappointing corporate performance and persistent banking fears.
PacWest shares sank 22.7% after the bank said in a securities filing Thursday that its deposits dropped 9.5% last week, following media reports that the regional bank was “evaluat[ing] all options.” Seeking to head off contagion fears, Western Alliance said its deposits have increased by $600 million since May 2. Western Alliance shares fell 0.77%.
Elon Musk said he is stepping down as Twitter CEO and will oversee product and software. Twitter will get a new CEO, an unnamed woman, in six weeks. Tesla (not Twitter!) shares jumped 2.1% on the news, suggesting investors of Musk’s other company were pleased — or just relieved.
JPMorgan Chase CEO Jamie Dimon warned that the U.S. defaulting on its sovereign debt would be “potentially catastrophic” — though he expects U.S. lawmakers to avert a debt crisis.
On that note, CNBC learned the debt ceiling meeting between President Joe Biden and other leaders, scheduled Friday, has been postponed until next week. But that’s a good thing because it allows lawmakers’ staffs, who are holding their own conversations, to make more progress before the big names are back in the same room, a source told NBC News.
PRO This chipmaker could hit more than $1 billion in revenue if things go well, according to Morgan Stanley. “Higher price points plus supply chain commentary is pointing to an opportunity that is multiples of our initial target,” wrote analyst Joseph Moore in a note to clients.
Upbeat economic data couldn’t overcome the resistance stocks faced from disappointing corporate performance and persistent banking fears.
First, the promising news (at least when it comes to inflation). April’s wholesale prices in the U.S. rose 0.2% for the month, less than the Dow Jones estimate of 0.3%. That translates to a 2.3% year-over-year increase, down from March’s 2.7% and the lowest since January 2021. In another sign inflation might be coming under control, initial jobless claims increased by 22,000 to 264,000 for the week ended May 6, according to the Department of Labor. That’s the highest reading since Oct. 30, 2021.
But that news didn’t shield markets from other fears. “Investor focus is now on both the economic backdrop and liquidity and what’s going on versus rates and inflation,” said Dylan Kremer, co-chief investment officer of Certuity.
And liquidity — or, in other words, the health of banks and their willingness or ability to make loans — was in focus again Thursday. PacWest shares tumbled, along with other regional banks like Zions Bancorp, which lost 4.5%, and KeyCorp, which fell 2.5%. The SPDR S&P Regional Banking ETF slid 2.5% Thursday.
Another big loser on Thursday was Disney, which sank 8.7% after the media giant reported it had lost subscribers from its Disney+ streaming service. That’s the largest one-day fall, in percentage terms, since Nov. 9, when the company slumped 13%.
Disney’s shares dragged down both the S&P 500, which declined 0.17%, and the Dow Jones Industrial Average, which slid 0.66%. However, the Nasdaq Composite managed to add 0.18%. The tech-heavy index was boosted by a 4.3% jump in Alphabet shares, which are trading at their highest level since August, thanks to investors’ optimism around the artificial intelligence products the tech giant announced at its annual developers conference.
After a heavy week of economic data releases, investor focus will turn to the looming debt ceiling in the U.S. Unease over a potential sovereign default has already spread through markets. For instance, yields for short-term T-bills have jumped sharply this month. Still, most economists and bankers — including JPMorgan CEO Dimon — expect the U.S. to avoid defaulting. It’s hard to imagine what would happen if they were proved wrong.
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A Pacific Western Bank sign is seen on May 4, 2023 in Los Angeles, California.
David Mcnew | Getty Images
Shares of PacWest were under pressure once again Thursday after the struggling regional bank said that deposit outflows resumed in the first week of May.
The stock dropped 22.7%, further extending its recent declines. PacWest’s shares have now fallen more than 50% this month and nearly 80% for the year.
PacWest’s stock was under pressure again on Thursday.
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The bank said in a securities filing Thursday that its deposits declined 9.5% during the week of May 5. PacWest said that the majority of those outflows came after media reports that said the lender was exploring strategic options.
The bank also said that it was able to fund those withdrawals with available liquidity. PacWest said it now has $15 billion of available liquidity compared with $5.2 billion in uninsured deposits.
The update marks a change from May 4, when PacWest said that it was not experiencing “out-of-the-ordinary deposit flows” and that total deposits had increased since the end of March.
During the first quarter, PacWest’s total deposits declined 16.9%, and the bank said it would use strategic asset sales to reshape its balance sheet.
Several Wall Street analysts theorized that the most recent outflows were from PacWest’s venture capital customers.
“While the deposit news is not what the company wants to report, if the outflows are truly from the venture depositors and not the core bank, that is better news, despite the higher total outflow disclosure. The financial result is that the company is borrowing more to replace those deposits,” RBC Capital Markets analyst Jon Arfstrom said in a note to clients.
Following PacWest’s filing, Western Alliance released its own update and said that total deposits have grown by $600 million since May 2. Shares of that bank were down less than 1% on Thursday. Elsewhere, shares of Zions Bancorp dipped 4.5% and the SPDR S&P Regional Banking ETF (KRE) was down 2.4%.
The regional banking sector has been under pressure since early March, when concern about the impact of higher interest rates led to a run on deposits at Silicon Valley Bank, which was seized by regulators. Signature Bank soon followed, and then First Republic was seized and sold to JPMorgan before the market opened on May 1.
JPMorgan CEO Jamie Dimon told Bloomberg News on Thursday that he thinks regional banks are “quite strong” but added “I think we have to assume there’ll be a little bit more” to the crisis.
Traders work on the floor of the New York Stock Exchange (NYSE), May 3, 2023.
Brendan McDermid | Reuters
PacWest’s stock was rebounding on Friday.
However, Friday’s rally made only a small dent in the week-to-date losses. PacWest still finished the week down 43% and below its closing level from Wednesday. The bank confirmed this week that it is exploring strategic options.
Western Alliance, which said it is not seeking a sale, has also been under heavy pressure this week, falling 27% even after Friday’s rally. The KRE finished the week down about 10%.
The steep declines, which came even at banks that reported much smaller deposit outflows than First Republic, led Wall Street analysts to warn that the stocks have become detached from their fundamentals.
“We are arguably reaching a point of hysteria,” Fundstrat strategist Tom Lee said in a note to clients on Friday.
This week’s slide came after First Republic was seized by regulators and sold to JPMorgan Chase before the market opened on Monday. JPMorgan CEO Jamie Dimon and Federal Reserve Chair Jerome Powell, among others, have said this week that they think the stage of banking crisis caused by deposit outflows is largely over, but the fall for the stocks shows investors are less confident.
Many on Wall Street are looking to Washington for regulatory changes to calm the banking system, such as potentially expanding deposit insurance rules. Some have raised the possibility of temporarily banning short-selling on bank stocks. Former Federal Deposit Insurance Corporation Chair Sheila Bair told CNBC’s “The Exchange” on Thursday that some of the share price declines are likely being driven by short-selling.
JPMorgan made a bold call on Friday, upgrading three regional banks despite a renewed rout in the sector this week that the investment bank says is partly due to short sellers. JPMorgan bank analysts led by Steven Alexopoulos made the following moves: Western Alliance upgraded to overweight from neutral Comerica upgraded to overweight from neutral Zions Bancorporation upgraded to overweight from underweight Regional bank stocks have been under heavy pressure again this week after First Republic failed and was sold to JPMorgan Chase before trading began on Monday. Alexopoulos said in a note to clients that the moves have been too dramatic. “Since regional banks reported 1Q23 results, which were not as bad as feared in terms of potential deposit outflows, regional bank stocks have seen intense shorting/selling pressure tied to a mismatch of (1) short-sellers feeling empowered post FRC [First Republic] being placed into receivership and (2) many long-only funds rethinking their capital allocation strategy into regional banks given concerns over NIM, credit and, new to the equation, deposit runs,” stated the note. “To this end, we believe a sell-off in regional banks has become a catalyst itself to cause further fear and selling pressure.” The SPDR S & P Regional Banking ETF , down 15% through Thursday this week, jumped 6% on Friday. The banks that JPMorgan upgraded have been hit even harder than the broader sector. Entering Friday, Western Alliance was down 51% for the week. Shares of Zions and Comerica had each fallen by about 28%. JPMorgan said in the note that those three stocks “appear substantially mispriced to us.” All three rebounded on Friday, with Western Alliance gaining more than 49%. The regional bank stocks have fallen despite the fact that the companies reported lower deposit outflows than First Republic. Western Alliance said Wednesday that it is not seeing abnormal deposit flows and still expects deposits to grow by $2 billion in the second quarter. Those deposit trends and potential regulatory changes could help the stocks rebound, according to JPMorgan. “We see a changing landscape, including the potential for regulatory changes (such as with FDIC insurance levels) or stock trading (such as a ban on short selling) or for the Fed to pivot (in line with market expectations). In the meantime, we see the favorable updates coming from select banks (such as WAL) that deposit balances have remained stable (or increased) helping to counterbalance very negative sentiment,” the note said. —With reporting by Michael Bloom
Traders gather at the post where First Republic Bank as the stock is halted from being traded on the floor of the New York Stock Exchange (NYSE) in New York City, March 15, 2023.
The collapse of Silicon Valley Bank last Friday has left investors scrambling to identify other regional banks that have similar balance sheet issues, namely a high rate of uninsured deposits and bonds or loans with a long time to maturity.
First Republic had the third-highest rate of uninsured deposits among U.S. banks, behind SVB and Signature Bank, which was closed by regulators over the weekend, according to a note from Raymond James. First Republic’s stock was down nearly 75% in March as of Wednesday’s close, and the bank’s debt has been downgraded by S&P Global Ratings and Fitch Ratings.
The plan announced on Wednesday called for $30 billion in deposits from major banks, including JPMorgan Chase and Bank of America, as a show of confidence in the regional banking system.
First Republic’s stock has been under pressure since the collapse of SVB.
The struggles for regional bank stocks early this week came despite the announcement from U.S. regulators over the weekend of additional support. That included a new program from the Federal Reserve that allowed banks to swap some assets for cash without having to realize the mark-to-market losses caused by higher interest rates.
First Republic said Sunday it had more than $70 billion in liquidity, not counting any additional support from the new Fed program.
In addition to the fears of more bank failures, the potential for increased regulation and smaller deposit bases for midsized banks could also be hurting the stocks as investors assess the future earnings power of the regionals.
The banking system got another shock Wednesday, when Credit Suisse‘s Swiss-traded shares fell more than 20% amid concerns that the bank’s “material weakness” in its financial reporting could lead to it needing to raise more capital. However, the Swiss National Bank, the country’s central bank, struck a deal with Credit Suisse to allow it to borrow up to roughly $54 billion.
But while Credit Suisse’s struggles could have ripple effects throughout the global banking system, the Swiss bank’s problems appear to be unrelated to the U.S. regional banks.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, March 13, 2023.
Brendan McDermid | Reuters
Bank stocks were under pressure on Wednesday as the sharp drop of Credit Suisse rattled a segment of the market that was already reeling from two large bank failures in the past week.
Shares of the Swiss bank fell more than 27% after its biggest backer said it won’t provide further financial support. Credit Suisse announced on Tuesday that it had found “material weakness” in its financial reporting process from prior years. Other European banks also slid, including an 8% drop for Deutsche Bank.
The move appeared to be hitting large U.S. banks as well. Shares of Wells Fargo and Citi fell more than 4% each in premarket trading, while Bank of America dipped 3%. JPMorgan and Goldman shed more than 2%.
Shares of Wells Fargo were under pressure on Wednesday.
While Credit Suisse’s struggles appear unrelated to the mid-tier U.S. banks, the combination of the two issues could spark a broader reexamination of the banking system among investors, according to Peter Boockvar of Bleakley Financial Group.
“What this is telling us is there’s the potential for just a large credit extension contraction that banks are going to embark on [to] focus more on firming up balance sheets and rather than focus on lending,” Boockvar said on CNBC’s “Squawk Box.”
“It’s a balance sheet rethink that the markets have. Also you have to wonder with a lot of these banks if they’re going to have to start going out and raising equity,” he added.
In that vein, Wells Fargo on Tuesday filed to raise $9.5 billion of capital through the sale of debt, warrants and other securities. The bank said the new cash will be used for general corporate purposes.
The fallout from the collapse of SVB could also lead to more regulation and rising costs for the U.S. banking sector, including the potential for higher fees to regulators to pay for deposit insurance.
A First Republic Bank branch in New York, US, on Friday, March 10, 2023.
Jeenah Moon | Bloomberg | Getty Images
Shares of First Republic were up sharply in early Tuesday trading as concern over the state of the regional bank appeared to ease after a day of heavy selling.
The stock traded 20% higher in the premarket and was one of the best-performing names in the SPDR S&P Regional Banking ETF (KRE) — which was up 5%. Shares of other regional banks also surged before the bell. PacWest jumped nearly 30%, KeyCorp gained 15%, and Zions Bancorp advanced 10%.
Those moves come after regional banks fell sharply on Monday, even after U.S. regulators took extraordinary measures to backstop all depositors in the now-failed Silicon Valley Bank. The KRE suffered its biggest one-day loss since March 2020, losing 12.3%.
In addition the backstopping SVB’s deposits, federal regulators also announced efforts on Sunday to stabilize the wider banking system. One of those is the Fed’s Bank Term Lending Program, which will allow banks to exchange certain high-quality assets for cash without booking mark-to-market losses.
