Friday, September 1, 2023

Bank stocks tumble for worst month since SVB sparked crisis 

It’s been more than five months since Silicon Valley Bank failed, but you wouldn’t know it from looking at bank stocks.

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The KBW Bank Index fell 8.8% in August, sending the sector to its worst month since the Spring chaos. The gauge is back where it was in March, when fear gripped the group after the sudden collapse of SVB and Signature Bank.

Investors have been reticent about piling back into an industry that’s facing increasing regulation and deposit costs, as well as a potential weakening in credit, particularly for office real estate. August also brought fresh worries as credit agencies downgraded a swath of lenders and expectations around the Federal Reserve’s rate path became increasingly uncertain.

“We’re slowly getting clarity, but there are just so many of these things that are going to take a while before, in the aggregate, investors are really comfortable,” said Piper Sandler analyst R. Scott Siefers. “We need a little more certainty on the path of rates, we need a little more certainty on the path of the economy at large.”

The banks also need to play their part, giving wary investors more guidance as they navigate the industry’s woes.

“Ideally we get better roadmaps at the individual company level as to how these banks intend to respond to some of these regulatory interventions,” Siefers said.

No Respite

Bank stocks have come under pressure this year after SVB and Signature sparked fears over deposit flight. And while the sector has bounced off the lows it hit in May around the failure of First Republic Bank, the KBW Bank Index remains down roughly 19% on the year, a sharp underperformance compared to the S&P 500’s 17% gain.

Earlier this month, Moody’s Investors Service lowered ratings on 10 lenders and said it may downgrade several major firms. Two weeks later, S&P Global Ratings followed suit and lowered grades for a handful of banks.

The reports were a reminder that “it’s going to be a long slog for the group,” Siefers said.

In late July, US regulators unveiled long-awaited reforms tied to Basel III, which would push big banks to adhere to tighter capital rules. A separate plan proposed this week would require banks with as little as $100 billion in assets to issue enough long-term debt to cover capital losses in situations of severe stress.

While money has started to make its way back into the financial sector, most of that is going to financial services companies including credit-card issuers and fintech shares, and less so to bank stocks.

Last week, Bank of America’s clients poured money into the financial sector for the seventh consecutive week — the longest recent buying streak of any other industry group, according to strategists at the firm led by Jill Carey Hall.

But “when we look at industry exposure within financials for mutual funds, it’s more of the other areas outside of banks that they’re more exposed to,” Carey Hall said.

Looking ahead, investors are likely to be closely following an industry conference hosted by Barclays for updates from firms about the litany of headwinds facing the sector.

(Updates throughout to market close.)

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