What happened
Shares of several bank stocks struggled today as the seizure of First Republic (FRCB) and the ultimate sale of most of its assets to JPMorgan Chase (JPM 0.06%) yesterday failed to assure investors that the banking crisis is over.
Shares of PacWest Bancorp (PACW) traded roughly 22% lower as of 11:48 a.m. ET today. Meanwhile, shares of KeyCorp (KEY 0.62%) traded roughly 8% lower, while shares of Comerica (CMA -0.15%) were down close to 10%.
So what
I think there are several reasons investors may not be thrilled with the resolution of First Republic. For one, the sale to JPMorgan Chase widens the rift between the "too big to fail" banks and the super-regional and regional banks.
Image source: Getty Images.
JPMorgan Chase technically wouldn't have been allowed to purchase First Republic under normal circumstances because it already has more than 10% U.S. deposit market share. Ultimately, I think it's a good outcome for the banking sector because it resulted in lower losses to the Federal Deposit Insurance Corp.'s (FDIC) Deposit Insurance Fund (DIF), but it's yet another way the largest banks are benefiting from the crisis.
The First Republic seizure and deal also adds another $13 billion of losses to DIF, which brings total losses from SVB Financial, Signature Bank, and First Republic to more than $35 billion. While small banks are lobbying hard to avoid a special assessment, arguing that this cost should be borne by the largest banks, there's no guarantee that they won't have to pay. Banks were already looking at higher FDIC assessment fees before the crisis began.
Another factor that may be prompting the sell-off is the fact that JPMorgan Chase did not assume First Republic's corporate debt or preferred stock. This morning, Bloomberg reported that the investment manager Cohen & Steers, normally a large buyer of bank preferred shares, has been selling preferred stock associated with regional banks recently.
"We have to take a step back and do a different type of analysis," Cohen & Steers senior portfolio manager Elaine Zaharis-Nikas told Bloomberg.
Then, of course, investors may have some macro fears, with the Federal Reserve's May meeting kicking off today and expected to conclude tomorrow with a quarter-point interest rate hike. While the hike is expected, commentary by the Fed that suggests it's not done hiking interest rates could lead to a jump in bond yields, which won't be helpful to banks in terms of funding costs and the unrealized losses in their bond portfolios.
Now what
I'm a bit surprised to see banks selling off so intensely today, as I viewed the sale of First Republic's assets as more of a resolution and step forward for the industry than an issue. The hit to DIF is also lower than many had expected. But it may have renewed focus on the banking sector and sparked concerns on whether more banks will fail.
I do think banks will face pressure on their funding costs and earnings this year. The regionals are also looking at heightened regulation.
But I view the sell-off today as more fear-driven. PacWest, Comerica, and KeyCorp have all reported earnings at this point, and while they are seeing pressure, most investors were OK with the results, given the difficult environment. Of this group, I think KeyCorp offers the most conservative risk-reward opportunity.
