What happened
Regional banks bounced around today after First Republic recently announced it is weighing its options. Additionally, investors are likely worried about the potential for an upcoming interest rate hike at the Federal Reserve's next meeting.
Shares of KeyCorp (KEY 1.74%) traded more than 10% down earlier this morning but had pared most of those losses as of 11:36 a.m. ET today and traded about 2% lower at that time. Meanwhile, shares of PacWest Bancorp (PACW) traded more than 13% lower, while shares of Western Alliance Bancorporation (WAL 3.05%) were only slightly down after having fallen more than 15% earlier today.
So what
Earlier this week, First Republic said it had secured additional liquidity and was not seeing excessive deposit outflows.
Image source: Getty Images.
However, last night media reports said the bank was exploring options to shore up liquidity or potentially sell the bank, indicating that deposit outflows have not stabilized yet, which is likely sparking concerns throughout the industry. Yesterday, S&P Global and Fitch lowered First Republic's debt rating.
First Republic is being closely monitored by investors because it has a significant amount of unrealized bond losses and a lot of its deposits are not insured by the Federal Deposit Insurance Corp. (FDIC). A sale of the bank now would likely not lead to a good price for shareholders with the stock trading at around just 30% of its tangible book value.
This news also comes after federal banking regulators recently backstopped deposits, ensuring that no customers that held deposits at SVB Financial's Silicon Valley Bank, which was put under FDIC receivership Friday, or Signature Bank, which was closed by regulators on Sunday, would lose their money. This was supposed to have calmed depositors, but some banks like First Republic are likely still experiencing deposit outflows. These bank stocks are also selling off after the European Central Bank (ECB) raised interest rates by a half-point, despite struggles in the banking sector.
Investors have been wondering whether or not the Fed will raise rates at its upcoming meeting next week, which could further pressure deposits at banks. SVB Financial, Signature, and Silvergate Capital, which also recently announced that it is planning to wind down operations, all experienced a run on deposits, which played a big part in their demise, so potential further pressure on deposits is not welcome news.
Now what
The good news is that KeyCorp, PacWest, and Western Alliance do not have material unrealized bond losses that haven't already been accounted for in relation to their equity, although PacWest and Western Alliance do have a lot of deposits not insured by the FDIC.
That said, banks are going to continue to struggle if interest rates keep rising but I think it's going to be more of an earnings struggle and likely not anything that would put any of these three banks out of business.
With all of these banks now trading at favorable valuations, I think this presents an attractive entry point. Given how volatile market conditions are right now, it probably makes sense to start with a smaller position and build it over time.
