Some investors are starting to hunt for bargains in regional banks that have been thrown into turmoil following the collapse of Silicon Valley Bank, according to portfolio managers and traders.
KBW’s regional banking index has fallen by more than a quarter since the start of the year, with the collapse of SVB and smaller peer Signature Bank prompting a liquidation in the financial sector in the US and abroad.
However, the index has shown tentative signs of stabilization over the past few weeks, posting its first two-week winning streak since early February. The KBW Regional Banking Index has recovered 11% from its year-to-date low in early May.
The lull has caught the attention of some investors, who have begun rebuilding their positions in the sector. Firestone, managing partner of Fourthstone, which specializes in investing in U.S. financials, said his fund had been on the defensive for the past 18 months due to recession fears, but is now a “firm buyer.”
“Some of the prices are the most attractive we’ve seen in years,” Stone added, comparing valuations to conditions after the 2008 financial crisis.
Still, many fear returning to the industry too soon.
“A lot of these banks are trading very cheaply,” said Remi Olu-Pitan, a multi-asset fund manager at Schroders. “But, as cheap as they are, they can get cheaper. The valuation signals are there, but we don’t have a (buying) catalyst yet. I think it will come in the second half of the year.”
George Patterson, chief investment officer at PGIM’s quantitative investment arm, agrees that “there may be some huge opportunities in regional banking because I think everyone is panicking” following the collapse of SVB. But he stressed the need for patience. “We’re never trying to bottom out.” . . I don’t think we’re (ready) adding to our positions yet. “
Patterson’s view is typical of many investors, according to industry analysts and trading desks. Ebrahim Poonawala, head of North American banking research at Bank of America, said: “We’re seeing .
However, the fundamental outlook for many regional banks remains weak, with challenges including a potential recession, an inverted yield curve that tends to weigh on margins and concerns about the health of the commercial real estate sector, he added.
Fourthstone’s Stone said concerns about regional banks’ exposure to commercial real estate were overblown, arguing it represented a small percentage of most lenders’ total lending. He also noted that for smaller banks, office loans tend to involve essential neighborhood businesses, such as doctors’ offices and insurance agencies, rather than larger businesses in inner-city areas.
“The Office is very sophisticated. Very few community and regional banks have the 70-story towers that people imagine,” he said.
Greg Hertrich, head of U.S. deposit strategy at Nomura, said regional bank management teams have been working hard to reassure investors that they have responded to concerns raised by the earlier collapse. But he said many investors will be waiting for further evidence in the second-quarter earnings report in July.
The speed with which the SVB collapsed in March was unprecedented, as social media and online banking allowed fear and withdrawals to spread rapidly. However, any recovery is unlikely to come at the same pace.
“The industry may be at a point where there is less risk to survival, but banking has historically not been a one-and-done industry,” Hertrich added.