What happened
Shares of several regional banks that came under intense selling pressure on Monday rebounded Tuesday as investors shook off the jitters from recent bank runs and failures over the past week.
Shares of First Republic Bank (FRCB) traded close to 58% higher as of 10:53 a.m. ET on Tuesday. Meanwhile, shares of Western Alliance Bancorp (WAL 0.39%) traded roughly 47% higher, and shares of PacWest Bancorp (PACW) were up 52%.
So what
Crypto bank Silvergate Capital (SI 11.11%) announced that it would wind down its operations and liquidate its assets last Thursday. Then SVB Financial Group (SIVB.Q) experienced a run on its Silicon Valley Bank, which was put into receivership on Friday. On Sunday, state regulators closed New York multifamily lender and crypto bank Signature Bank (SBNY).
Image source: Getty Images.
While all banks have different models and somewhat different issues, investors were worried about the unrealized losses sitting in banks' bond portfolios. If these banks experienced deposit runs and had to sell bonds at a loss to cover the outflows, it could destroy a significant amount of shareholder equity.
The good news is that none of these banks had the same amount of losses sitting in their bond portfolios as SVB, which had gone in too early and too long on bonds before interest rates rose. It had enough losses in its bond book to wipe out all of its tangible common equity and saw customers pull $42 billion of deposits on March 9.
But the bad news was that depositors were nervous and nobody could rule out a full-scale bank run, even after federal banking regulators announced Sunday that they would essentially backstop all customer deposits. The Federal Reserve announced that its Bank Term Funding Program would essentially provide qualifying banks a loan using securities as collateral. This would effectively make depositors whole at SVB and Signature.
Analysts largely came to bat for these three banks yesterday. JPMorgan Chase analyst Steven Alexopoulos called the selling of First Republic yesterday a "dramatic overreaction," and kept an overweight rating on the shares, citing the firm's strong liquidity.
First Republic tapped JPMorgan Chase and the Fed for additional liquidity and now has $70 billion of unused liquidity. Furthermore, First Republic CEO Jim Herbert told CNBC yesterday that the bank was not seeing huge deposit outflows.
Western Alliance also took additional steps to boost liquidity yesterday, increasing cash reserves to $25 billion.
Now what
I think that over time, the move by federal banking regulators to backstop deposits should tell all depositors that their money is safe. Regulators are not going to let customers lose money over the foolish actions of bank management teams or their own lack of oversight.
I'm hopeful that this should shore up liquidity and help these stocks -- which have historically had strong business models -- rebound over time. First Republic, Western Alliance, and PacWest do not have the same amount of unrealized bond losses, and their customer base is more diverse than that of SVB, which relied heavily on early-stage companies, venture capital, and private equity companies.
If you are interested in taking a position, my advice would be to start small and build one gradually. Their stocks are still volatile, and these banks will likely struggle with earnings in the near term because deposit outflows, higher deposit costs, and holding cash are likely going to weigh on earnings. That said, based on what we can observe, I do see these banks surviving and rebounding over time.
