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Some investors are starting to sift for bargains among the regional lenders that were caught up in the market chaos that followed the collapse of Silicon Valley Bank, according to portfolio managers and traders.
KBW’s Regional Banking index has fallen more than a quarter since the start of the year, with the collapse of SVB and smaller peer Signature Bank prompting a reckoning across the financial sector in the US and abroad.
However, the index has shown tentative signs of stabilising in the past few weeks, notching up two consecutive weeks of gains for the first time since the start of February. The KBW Regional Banking index has regained 11 per cent from its year-to-date nadir earlier in May.
The calm is drawing the attention of some investors, who have started rebuilding their positions in the sector. Phil Stone, managing partner at Fourthstone, which specialises in investing in US financials, said his funds had been defensive for the past 18 months because of recession fears, but were now “high conviction buyers”.
“Some of the prices are the most attractive we’ve seen in years,” Stone added, comparing valuations to the aftermath of the 2008 financial crisis.
Still, many remain wary of diving back into the sector too early.
“A lot of these banks are trading dirt cheap,” said Remi Olu-Pitan, a multi-asset fund manager at Schroders. “But although they’re cheap, they could get cheaper. The valuation signal is there but we don’t have that catalyst [to buy] just yet. I think it will come towards the second half of the year.”
George Patterson, chief investment officer at PGIM’s quantitative investing arm, agreed that “there’s probably some great opportunities in regional banking because I think everybody had panicked” in the aftermath of SVB’s collapse. But he stressed the need for patience. “We’re never trying to call the bottom . . . I don’t think we’re quite yet [ready to be] increasing positions.”
Patterson’s view was typical of many investors, according to sector analysts and trading desks. Ebrahim Poonawala, head of North American banks research at Bank of America, said: “We’re seeing . . . a lot of pencil sharpening, probing and digging into individual companies” as fears of immediate contagion risk recedes.
However, he added that the fundamental outlook for many regional banks remained weak, with challenges including a potential recession, an inverted yield curve which tends to weigh on profit margins, and concerns about the health of the commercial property sector.
Fourthstone’s Stone said concerns about regional banks’ exposure to commercial real estate were overblown, arguing that it represented a small fraction of total loans for most lenders. He also pointed out that for the smaller banks, office loans tend to involve basic community businesses such as doctor’s offices and insurance agencies, rather than city centre monoliths.
“Office is so granular. Few community and regional banks have the 70-floor towers that people envision,” he said.
Greg Hertrich, US head of depositary strategies at Nomura, said regional bank management teams had been working to reassure investors that they had responded to the concerns sparked by the earlier collapses. But he said many investors would wait for further evidence from second-quarter earnings reports in July.
The pace of SVB’s collapse in March was unprecedented, as social media and online banking allowed concerns — and withdrawals — to spread quickly. Any recovery, however, is unlikely to come at the same speed.
“The sector is probably at a point where there is less existential risk,” Hertrich added, “but banking is not, historically, a sector that turns on the proverbial dime.”
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