The SPDR S&P Regional Banking ETF (KRE) dropped 6% on Friday and plummeted 27% over the past month due to investors’ concerns about carrying high risk exposure over the weekend. On Sunday, UBS agreed to purchase troubled Credit Suisse for approximately $3.25 billion in a fire sale, marking a 60% decrease from where its stock closed on Friday. Although it may seem tempting for investors to avoid the high-risk corner of the current market, heightened fear can create exceptional investment opportunities. Billionaire Bill Ackman tweeted last week that regional banks are an “incredible bargain.” Despite the need for investors to tolerate some risk, analysts believe there are still promising signs for some of these stocks.
“The market is, in many ways, adopting a ‘shoot first, figure it out later’ mentality,” says Chris McGratty, head of US bank research at KBW. “Most banks we’ve talked to had some really unsettling deposit trends last Monday, but each day that’s gone by, it’s gotten better.”
Among the hardest-hit names, McGratty’s preferred stock is Phoenix-based Western Alliance Bancorp. (WAL), a bank with $68 billion in assets and 36 locations concentrated in the western United States. Although its stock has declined 57% in the past two weeks, it has rebounded 25% since reaching its low point last Monday. Currently trading below its tangible book value, the bank has a more diversified customer base than SVB did, says McGratty. On Friday, the bank released a statement reassuring investors, indicating that it had more than $20 billion in immediately available liquidity, 55% of its deposits were insured, and net deposit outflows had stabilized quickly.
McGratty also recommends Old National Bancorp based in Evansville, Indiana (ONB), which has a more conservative risk profile, consistent earnings, and a 3.7% dividend yield. Its decline over the last month is only 14%. Following Sunday’s news that it’s buying most of failed Signature Bank’s assets for $2.7 billion, he upgraded New York Community Bancorp. (NYCB) as well, which rose 35% on Monday following the news, recouping all of its losses from the previous two weeks.
Analysts are cautious about First Republic Bank, a San Francisco-based bank that caters to wealthy clients and has suffered the most damage from the SVB collapse. Its stock has plummeted 84% in the past two weeks and fell 33% on Friday. Eleven banks, including JPMorgan, Citigroup, Bank of America, and Wells Fargo, committed $30 billion in deposits on Thursday to prompt a 70% intraday gain. However, Chris McGratty, Head of U.S. Bank Research at KBW, notes that the banks are taking $30 billion because the deposit outflow situation had become challenging, indicating that the bank is not in a position of strength.
The New York Times reported on Friday that First Republic is in talks to sell a portion of itself. Its high net worth customers could be an attractive feature for a competitor to acquire at the right price. However, the bank has steered itself into trouble in part due to low fixed-rate mortgages it offered to these clients, which have lost value in the last year of rising interest rates. S&P Global downgraded its credit rating multiple times over the weekend into junk territory, and its stock was down another 13% Monday morning.
According to Dick Bove, a banking analyst at Odeon Capital Group, if investors conclude that the bank will remain in business, then their decision regarding the stock is related to the earnings outlook. However, the earnings outlook is stressed, as the bank has fixed rates below the market to attract large depositors or investors into their investment company, resulting in a low-yield portfolio.
Even prior to the recent market turmoil, regional bank stocks have underperformed the broader market for an extended period. Over the past five years, the KRE ETF has declined by 23%, while the S&P 500 Index has gained 52%.
Bove believes that the acute concerns of widespread bank failures have subsided, presenting an opportunity for a rebound. However, he still prefers bank preferred stocks over common stock. Many preferreds currently offer a yield of 6% to 7%. Of the 20 preferred stocks that he recommends, Bove highlights a 6.2% PNC issue that currently yields 7%, a 5.6% Wells Fargo preferred yielding 6.2%, a 5.3% preferred from U.S. Bancorp yielding 5.7%, and a secure 4.55% JPMorgan preferred offering 5.7%.
“These banks are definitely not going to miss the preferred payment, particularly if they have to sell common equity,” he explains. “I don’t want to deal with all the uncertainty about their earnings or the amount of money they need to raise. With bank preferreds, I am totally protected in my view, I get a high yield, and I think that’s the way to go.”
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