Four months ago, Western Alliance (WAL) found itself in a crisis as depositors fled after the collapse of Silicon Valley Bank. This week, executives made it seem like that drama was a thing of the past.
“I don’t think there’s any lasting damage,” CEO Kenneth Vecchione told analysts after reporting that deposits at the Phoenix-based bank rose 7% in the second quarter and are likely to rise again in the third.
Investors liked what they heard, even as earnings fell. Western Alliance stock rose nearly 8% the next day and ended the entire week up 24%.
Results from numerous regional banks last week allayed any lingering fears that mid-sized financial institutions face an existential threat that surfaced in the spring when the failure of three major banks triggered outflows across the banking system.
Deposits rose at most smaller banks, even at those that suffered outflows in the first quarter, and investors responded by edging up share prices.
The KBW Nasdaq Regional Bank Index (^KRX), which tracks the performance of smaller banks, rose 7.3% this week, its best weekly performance in more than a year. The KBW Nasdaq Bank Index (^BKX), which includes some of the largest banks, was also up 6.5%.
Zions (ZION), a Salt Lake City-based bank, rose 9% on Thursday. Citizens (CFG) of Providence, Rhode Island, rose 6% on the same day. Minneapolis-based US Bancorp (USB) was also up 6.5% on the day of publication.
However, the results also showed that some of these banks still face numerous challenges.
Most attracted more deposits during the quarter by paying much more for them, which is a key indicator of profitability. Twelve regional lenders have lowered their estimates of revenue or loan profits for the remainder of the year, including PNC (PNC) and Truist (TFC), and Western Alliance and Zions.
Many of these institutions are also anticipating higher Federal Reserve capital requirements, which could be released as early as next week. Bankers argue that tighter buffers would make it harder for them to generate solid profits going forward and potentially limit lending.
The story goes on
“If you spot a robin, it’s not spring yet”
The rise in bank stocks this week is due to banks’ values falling relative to the rest of the market so far, Odeon Capital analyst Dick Bove said in a note.
“There has been no material change in the Group’s earnings outlook,” he wrote. In fact, “many banks are advising investors to exercise caution in estimating future earnings results.”
One such institution is Cincinnati-based Fifth Third (FITB), the 17th largest bank in the country. Deposits increased, but the bank reduced its full-year forecast range for net interest income. This metric measures the difference between what banks earn on their loans and what they pay for their deposits.
“We will always plan for a more conservative outcome because when we’re wrong everyone is fine and when we’re right we’re better positioned to deliver stable earnings,” said CEO Tim Spence.
The bank’s chief financial officer, James Leonard, told analysts that “our June, like everyone else’s, was pretty strong,” but “spotting a robin doesn’t mean it’s spring.” So we will continue to be cautious about the outlook and remain vigilant in this environment.”
A Fifth Third store in Boca Raton, Florida. Portal/Joe Skipper
According to Matt Maley, chief market strategist at Miller Tabak, the prospects for regional bank stocks “really don’t look that good” in the near term based on fundamentals.
“Lending has declined,” Maley said. “Where will they make money?”
Chris McGratty, head of US banking research at Keefe, Bruyette & Woods, noted that “stocks have outperformed because expectations were really, really, really low,” admitting that his team “had a pretty good hatchet on future earnings estimates” ahead of last week.
He also referred to the technical contribution to this week’s rally. According to data from market analysis firm S3, short sellers were forced to buy $469 million worth of bank stocks over the past seven days to cover their positions.
According to the data, the top contributors to the rise were US Bancorp, Zions and Cleveland-based KeyCorp (KEY).
“There’s been a lot of short covering,” McGratty said, adding, “When things seem less dire, it can boost spirits.”
Private investors were also involved this week. Regional bank stocks saw average daily inflows three times the previous two weeks during the height of the rally on Wednesday, according to data from market analysis firm Vanda.
“It looks like retailers have taken the good news surrounding insoles calmly and decided to pursue some of these regional names rather than sell them,” Marco Iachini, Vanda’s senior vice president of research, told Yahoo Finance.
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