What happened
Another day, another rout for bank stocks.
Continuing last week's sell-off prompted by the failure and subsequent regulatory takeover of SVB Financial Group's (SIVB.Q) Silicon Valley Bank, several bank stocks are down again on Monday. Last week's biggest losers like PacWest Bancorp and First Republic Bank are once again in the mix. But, today's drubbings also include far bigger outfits. Bank of America (BAC 1.59%) and U.S. Bancorp (USB -3.61%) are lower to the tune of 3.3% and 8.5% (respectively) as of 12:59 p.m. ET Monday, with investors increasingly fearing more banks may be undercapitalized.
It's not just familiar, conventional bank stocks now on the defensive either. Shares of Synovus Financial (SNV -0.03%), credit card middleman Synchrony Financial (SYF -0.60%), and online banking and lending outfit Ally Financial (ALLY 0.86%) are down 11.4%, 9.1%, and 8.8%, respectively, today as the wave of worry widens to all types of lenders.
So what
The weakness that shares of BofA, Synchrony, and other lenders are exhibiting on Monday ultimately stems from last week's failure of Silicon Valley Bank. Against a backdrop of inflation, economic weakness, and rising interest rates, the bank was forced to sell $21 billion worth of U.S. Treasury bonds in order to meet its liquidity needs.
That sale was completed at a loss, leaving the company more than $2 billion short of the capital it needed.
Its plans to sell equity to shore up the shortfall flopped. And, at the same time, many of its customers -- including several of Silicon Valley's tech companies -- accelerated their withdrawal of funds from the struggling bank, exacerbating its funding woes.
The tone of the sell-off is changing though. Last week's weakness was mostly limited to smaller, California-based banks like PacWest and First Republic. Today's selling has spread to the larger end of the market tier spectrum, and to online lenders and other organizations at risk of being undercapitalized or simply at above-average risk of loan defaults and delinquencies.
Now what
The headlines are admittedly jarring, and particularly troubling for investors who lived through 2008's subprime mortgage meltdown. Although this isn't an identical situation, the core cause of the selling now is the same as it was then -- banks and lenders may be too leveraged to handle the current economic headwind marked by lingering inflation and relatively high interest rates. Not even bigger names like Bank of America, U.S. Bancorp, or Synchrony Financial are presumed to be immune.
The thing is, many of the bank stocks down today are actually well shielded from the undercapitalization woes that upended Silicon Valley Bank.
There are risks to be sure. But the risks worth worrying about don't include outright bank failure or undercapitalization. That's because the nation's biggest banks now regularly undergo so-called "stress tests" to ensure they can survive conditions like the ones the industry is facing now without the need for fiscal assistance of fresh capital.
Both U.S. Bank and BofA passed their most recent stress tests (administered by the Federal Reserve) with flying colors.
Yes, economic weakness can crimp demand for new loans, fundraising, or investing, which undermines earnings. But after the selling that's been underway for most of these names since early last year, the risk is more than reflected in these companies' stock prices.
Interested investors should use these steep pullbacks as an entry point. As Goldman Sachs analyst Lotfi Karoui told Yahoo! Finance: "We think the risk of contagion from small to large banks is remote. ... Similarly, the risk of a capital or liquidity event among large banks is also remote." Karoui added, "We reiterate our overweight recommendation on the sector and would use any large sell-off as an opportunity to add risk."
The only catch? Be sure you're stepping in for the long haul. Plenty more near-term volatility is in the cards, which could easily send these stocks lower before they start moving higher again.
