After a volatile two months, regional bank stocks are finally getting a reprieve even as deposit flows remain under pressure.
Deposits at US banks totaled $17.1 trillion for the week ending May 10, marking a $57 billion drop from the previous week’s levels, according to recent data released by the Federal Reserve. This means that banks have given up almost all of their gains from the previous week. But the data also shows that bank investors may not have much reason to worry. The pace of deposit flight was below levels seen in March and April when Silicon Valley Bank, Signature Bank and First Republic Bank collapsed.
And that gives some on Wall Street reason to be optimistic about regional bank stocks.
“No news is good news for depressed regions,” said Brody Preston, analyst at UBS Securities
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wrote on Tuesday. Although deposits declined, banks saw an increase in cash and other assets each week, indicating that overall the sector’s balance sheets are in “decent shape,” he wrote.
This is welcome news for regional bank stocks that have been hammered this year as investors worry about deposit flight. The SPDR S&P Regional Banking ETF (KRE) fell as much as 43% in early May as the sector spooked. The ETF is now down 35%.
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Wall Street is now coming around to the notion that the overall banking system is sound and that any other issues are “idiosyncratic,” Preston wrote. PacWest Bancorp (PACW) is a bank that has come under particular pressure in recent months with shares down more than two-thirds this year. Shares fell more than 50% earlier this month following reports that the Beverly Hills-based bank was weighing strategic options. PacWest shares rebounded from those lows and climbed 7.7% in Tuesday’s trading, continuing gains after announcing Monday that it was selling a $2.6 billion property-loan portfolio to boost its liquidity.
All of this suggests that much of the turmoil that has plagued bank stocks over the past few months is largely in the rearview mirror. Deposit levels may still come under pressure as savers now have better options for earning interest on their savings than their traditional savings accounts but deposits are not fleeing as the savers fear the solvency of their banks.
All told, the UBS team was generally encouraged by what it saw in recent Fed data as well as other banking sector news.
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“Taken together, this week’s results show that despite the large discount that remains at regional banks, balance sheets are largely healthy and liquid, and single-stock bad news seems to be driving the group to compound issues are actually single-stock issues at a fundamental level,” Preston wrote.
Write to Carleton English at carleton.english@dowjones.com
