What happened
Shares of several bank stocks rose today after selling off last week, largely due to positive sentiment from Wall Street. Shares of Western Alliance Bancorp (WAL -0.51%) rose nearly 12% today, shares of KeyCorp (KEY -1.89%) rose more than 6.5%, and shares of Charles Schwab (SCHW -4.60%) ended the day up more than 4%.
So what
Bank stocks got hit extremely hard last week but there wasn't a lot of new information that came to light. Investors sold $2.1 billion worth of financial stocks in the week ending May 10, according to the data and research firm EPFR. That's the most selling the sector has seen in roughly a year.
Image source: Getty Images.
But today, the market seemed to be heeding the advice of Wall Street analysts who have been bullish on the banking sector at these beaten-down levels. Raymond James analyst Patrick O'Shaughnessy upgraded Schwab to outperform on the belief that client "cash sorting" from Schwab's sweep accounts to higher-yielding bank products is finally nearing an end.
"With bank sweeps as a percentage of total client cash quickly approaching their low point over the last 8+ years, we believe most rate-sensitive client cash has already moved to money market funds," O'Shaughnessy said in a research note.
Between the first quarter of 2022 and 2023, Schwab has seen its bank deposits fall by a whopping $140 billion. It has had to replace most of these outflows with higher-cost borrowings, which really hurt the bank's earnings, so the end of the intense cash sorting would be very helpful for the company.
In other more broadly positive news for the sector, Michael Burry's firm Scion Asset Management bought the dip in bank stocks during the banking crisis, according to new regulatory filings released today.
Burry rose to fame for effectively shorting the housing market prior to the Great Recession and was portrayed by actor Christian Bale in the movie The Big Short. Scion purchased 850,000 shares of New York Community Bancorp; 250,000 shares of PacWest Bancorp; 184,900 shares of Huntington Bancshares; 150,000 shares of First Republic; 125,000 shares of Western Alliance; and 75,000 shares of Capital One Financial.
Western Alliance has been one of the more volatile bank stocks in the industry. The stock got unfairly hit last week due to news reports that the bank was considering selling itself, which management vehemently denied.
The bank should be able to get through this difficult period and rebound, but the stock is going to be more volatile than most in the sector. Investors need to be prepared for that.
Now what
Banks are facing challenges because they're likely going to deal with higher funding costs and more margin compression this year. Large regional banks are likely going to face tighter regulation and stricter capital and liquidity rules. All these could negatively impact earnings.
I think that last week's selling was overdone and not driven by new information. However, there's definitely a lot of uncertainty still in the environment, and I expect bank stocks to continue being volatile this year.
Still, I like a lot of super-regional bank stocks like KeyCorp at their current valuations and think many are poised to be good investments long term. I'm a little bit more cautious about Schwab. While I think the bank can navigate through this difficult environment, I will feel a lot better when cash sorting firmly stops.
