Analysis: Investors seek value in clobbered U.S. regional bank shares

First Citizens Bancshares (Tennessee)

28/03/2023 18:00

By David Randall
       NEW YORK, March 27 (Reuters) - As U.S. banking contagion
worries ebb, some investors are hunting for shares of
fundamentally strong regional lenders that were swept up in this
month's epic sell-off.
    Investors sent a record net $236.2 million into the iShares
Regional Bank ETF  IAT.P  over the last two weeks, after Silicon
Valley Bank's collapse earlier this month fueled concern about
banking system stability and sparked a sector-wide rout. The ETF
has slumped nearly 26% since March 8, when SVB's troubles became
known, while the S&P Regional Banks Select Industry Index
 .SPSIRBK  is down around 23%.
    Concerns over deposit flight are still swirling around some
regional banks. Some fund managers, however, believe the
sell-off has created bargains and are building positions in
companies they think will pull through.
    "There's an awful lot of companies that we think of as being
relatively far away from the center of the storm that are down
more than 20%, so the valuations have improved materially," said
Hunter Doble, a portfolio manager at Hotchkis & Wiley. He owns
shares of large regional banks including Citizens Financial
Group Inc  CFG.N , which have fallen about 22% so far this year,
and US Bancorp  USB.N , which are down some 18%.
    
    
        Recent developments have buoyed hopes that the banking
crisis may be contained. U.S. regulators said on Monday they
would backstop a deal for regional lender First Citizens
BancShares  FCNCA.O  to acquire SVB, sending the rescuer's
shares up nearly 54% on the day.
    On Saturday, Bloomberg News reported that U.S. authorities
are considering expanding an emergency lending facility that
would offer banks more support.
    Lawmakers are expected to put top U.S. bank regulators on
the defensive over the unexpected failures of Silicon Valley
Bank and Signature Bank when they testify before Congress on
Tuesday.
    Margie Patel, a senior portfolio manager at Allspring Global
Investments, has been adding new positions in regional banks
over the last few weeks, citing "value." 
    "The decline that we've seen in the sector is reflecting
fears of repeating 2008 but I think it's fundamentally
different," she said.
    Banks will soon have a better match between revenue from
higher-rate loans made over the past year and higher interest
payments to depositors, a balance that went "out of whack" after
the Federal Reserve raised benchmark rates nearly 500 basis
points, Patel said.
        Inflows into bank stocks and ETFs are also being
bolstered as retail investors seek bargains in battered shares,
analysts at Vanda Research said last week.
  
    Still, plenty of headwinds remain, especially for smaller
banks whose clients have moved deposits to larger banks for
greater stability. Clients may also be ditching their checking
accounts in favor of short-term Treasuries, money markets and
other investments with far higher yields.
    Large banks gained $120 billion in deposits but small banks
lost $109 billion last week, while money market fund balances
grew by $121 billion, adding to record inflows earlier in the
month, according to Moody's Investors Service.
    Regional banks "need positive news that shows their deposits
are holding firm or growing," said Rick Meckler, a partner at
family office Cherry Lane Investments.
    Investors have in recent days become more confident the Fed
will raise rates at its next meeting, as worries over financial
stability have ebbed. Higher rates could pressure margins while
further boosting the allure of higher-yielding products that
have been draining deposits.
    Investors on Tuesday morning were pricing a 48% chance of
another rate hike, up from a 17% chance on Friday, according to
CME FedWatch Tool.
    Still, Christopher Marinac, director of research at Janney
Montgomery Scott, believes regional banks have stronger balance
sheets than many fear, which enable them to weather a recession
and an increase in bad loans. 
    Marinac recommends buying PacWest Bancorp  PACW.O  and New
York Community Bancorp Inc  NYCB.N , citing gains in the
industry's loan loss reserve ratio - money set aside to cover
bad loans - to an estimated 1.12% from 0.92% in the fourth
quarter of 2019.
    "We feel reserves are solid and rising for the banking
industry," he said. 

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 (Reporting by David Randall; Additional reporting by Sinead
Carew; Editing by Ira Iosebashvili and Richard Chang)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))