What happened
Shares of most bank stocks headed south today as concerns over the sector came back into focus and seemed to worry investors that the banking crisis is not yet over.
Shares of Truist Financial (TFC 3.05%) traded roughly 2.4% lower as of 1:44 p.m. ET today. Meanwhile, shares of KeyCorp (KEY 1.74%) traded nearly 6% lower, while shares of Comerica (CMA 1.78%) were down by roughly 4.5%.
So what
Earlier today, the Federal Deposit Insurance Corp. (FDIC) issued its quarterly report from the first quarter, which the agency issues to review how the sector performed as a whole and identify trends every quarter.
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The report showed that the U.S. banking system lost roughly $472 billion of deposits, or 2.5% of total deposits, which is the largest quarterly decline experienced since the FDIC started gathering the data in 1984. The decline largely came from uninsured deposits over the $250,000 level that the FDIC guarantees per depositor per bank. What may be even more worrisome is that regulators are still concerned about what could still be coming.
"The more lasting effects of the industry's response to that stress may not become fully apparent until we've received the second-quarter results," FDIC chair Martin Gruenberg told reporters in a press conference after the FDIC released the report.
The FDIC's list of problem banks also increased from four to 43, with the total assets held by banks on the problem list up to $58 billion.
Economists at EY-Parthenon said in a recent research note:
Banking sector turmoil is contained but not over, and the impact on the economy will linger as smaller banking institutions play a key financial role. Looking ahead, increased bank funding costs and deposit volatility will keep pressure on small and midsized banking institutions, leading to tighter credit conditions and lingering effects on private-sector activity.
Investors also seem to be growing increasingly concerned that the Federal Reserve will not pause its interest rate-hiking campaign at its next meeting in June, as previously thought. The consensus is that the Fed will move ahead with another quarter-point hike. More rate hikes would continue to drive bank funding costs higher and also likely put more strain on credit down the line.
Now what
I did not find the FDIC's report terribly surprising, given the banking crisis that broke out in March. Growth in the FDIC's problem bank list may also not be as bad as it looks because it could largely be composed of one or two regional banks or a bunch of small banks. It's concerning to be sure, but not necessarily a systemic issue.
However, I would agree with Gruenberg that the second quarter is going to be important, and banks will likely continue to see funding cost move higher, putting pressure on their margins. I am also not entirely sure what the full impact of quantitative tightening will be on bank deposits as the Fed pulls liquidity out of the economy.
Generally speaking, though, I find most regional banks to be trading at attractive valuations. I think commercial real estate concerns are overblown and that most larger regional banks have strong enough deposit bases to weather the current pressure -- not that it won't impact near-term earnings.
Of these three names, my favorite pick is Truist. I like the markets the bank is operating in, its deposit base, and capital position, as well as its strong roughly 6.9% dividend yield.
