What happened
Bank stocks got creamed today, as concerns over the banking crisis did not alleviate after JPMorgan Chase (JPM 1.44%) acquired most of the assets of First Republic (FRCB), which regulators seized yesterday.
Shares of Bank of America (BAC 1.70%) fell roughly 3% today. Meanwhile, shares of Charles Schwab (SCHW 1.31%) fell 3.3%, while shares of the credit card and payments company American Express (AXP 2.56%) ended the day down 3.8%.
So what
Today's large sell-off certainly caught me by surprise, as I thought the resolution of First Republic yesterday might put an end to some of the uncertainty that has plagued the banking sector since the banking crisis began in March.
Image source: Getty Images.
But bank stocks across the board suffered a huge sell-off, with the SPDR S&P Regional Banking ETF falling nearly 6.3%, which is a big move for an exchange-traded fund, no less one that focuses on banks. Some of the names that investors have been more concerned about like PacWest Bancorp and Western Alliance Bancorporation ended the day down roughly 28% and 15%, respectively, despite reporting first-quarter earnings that seemed to reassure investors not long ago.
Bank of America and Schwab have been under more pressure than their larger bank peers since the banking crisis began due to the large amount of unrealized bond losses both banks have on their balance sheets. Still, the likelihood of these banks having to sell these bonds at a loss is very low, if not seemingly implausible.
But there's undoubtedly still unrest among investors. Bloomberg reported today that the asset manager Cohen & Steers, which has been a consistent buyer of preferred stock in banks, has been reducing its exposure to such instruments recently.
"We have to take a step back and do a different type of analysis," said Elaine Zaharis-Nikas, a senior portfolio manager at Cohen & Steers. "We want to see some more stability... We are waiting to see if the deposit flight has stabilized."
There is also continued focus on the Federal Reserve's meeting, which started today and will conclude tomorrow, likely with a quarter-point rate hike, as well as other macro fears.
Said AXS Investments CEO Greg Bassuk, according to CNBC:
We think that the concerns around the bank sector, combined with uneasiness regarding the debt ceiling -- and most importantly, apprehension over the uncertain future Fed rate policy stance -- are all contributing to this risk off sentiment. So in an area like the bank sector that already was under stress, we're also seeing greater unease because of these other contributing factors.
Now what
Again, I was definitely surprised by the sell-off today, but I am guessing that another bank failure has put renewed focus on the sector. Investors are also concerned about what the Fed will say tomorrow. If the Fed talks about the potential for more rate hikes after tomorrow, that's likely going to hurt the market and banks because it will continue to put pressure on funding costs.
Ultimately, while a bit unnerving, I do view the sell-off in the banking sector today as an overreaction because I didn't see much news or change to the current situation, although perhaps investors are getting ahead of what they expect to see from the Fed tomorrow.
Of this group, I like Bank of America and American Express. While I think Schwab can navigate this environment, I would like to see stabilization in its sweep deposit base before investing in the stock. I think it's quite possible that Schwab sees more earnings pressure this year than other banks.
