Bank stocks reversed lower Wednesday after the Fed announced another interest rate hike and Chair Jerome Powell didn't rule out additional increases. Financial shares turned sharply lower Tuesday as markets continued to react to Monday's FDIC seizure and sale of First Republic Bank to JPMorgan. The selling came on the heels of the second largest bank failure in U.S. history, and resumed with the Fed rate hike — compounding the rate increases that had tripped the year's first bank failures in March.
Goldman Sachs noted Tuesday that regional banks are still exposed based on regulators' response to First Republic, CNBC's Leslie Picker reported. "We believe that the use of the systemic risk exception whereby the FDIC guarantees the full deposit may be used less frequently, as the uninsured deposits are taken over by the acquiring institution," Goldman Sachs wrote.
That puts regionals at a big disadvantage as their smaller balance sheets can't compete from a cost standpoint. And larger firms, such as JPMorgan, can benefit at the expense of smaller peers.
Banks retreated Tuesday. Trading was halted for some bank stocks, including PacWest and Western Alliance, due to volatility at around 10:30 a.m. but resumed around 10:35 a.m. ET. Meanwhile, eyes turn to the Federal Reserve meeting this week as a rate hike on Wednesday seems certain.
Bank Stocks React To First Republic
Among regional banks, PacWest fell 2% Wednesday after a 9.6% spike in early trading. PACW stock closed down 27.8% Tuesday. Zions Bancorp retreated 5.3% after surging 4% in early trading. Shares were down 11% Tuesda. Western Alliance weakened 4.4% Wednesday and carved more than 15% lower Tuesday. Regions Financial retreated 6.7% and Charles Schwab slumped 3.3% Tuesday after taking substantial hits. RF declined 2% Wednesday and SCHW stock shed more than 4%.
The larger banks edged lower Wednesday after paring their Tuesday losses in early trading.
Morgan Stanley and Goldman Sachs inched more than 1% lower. Shares trimmed Tuesday losses to less than 3% by close. Morgan Stanley had just announced it would cut 3,000 jobs from its workforce by the end of the current quarter. Bank of America slipped 1% following its 3% decline from Tuesday. JPMorgan Chase eased another 2% Wednesday and declined 1.6% Tuesday, edging further from the buy zone for its cup-with-handle base.
Among the 197 industry groups tracked by IBD, super regional banks tumbled 37% Tuesday. West/Southwest banks dropped almost 33%. Northeast banks were down 27% near midday.
The SPDR S&P Regional Banking ETF traded down more than 6% Tuesday, holding near its lows. The Financial Select Sector SPDR Fund dipped 2.3%. KRE fell 1.8% Wednesday while XLF dipped 1.1%.
First Republic Bank Sale
On Monday, the California Department of Financial Protection and Innovation closed San Francisco-based First Republic Bank and appointed the FDIC as receiver. Regulators then sold the bulk of the bank's business to JPMorgan Chase for $16 billion.
JPMorgan will assume $92 billion of First Republic's insured and uninsured deposits. That includes $30 billion in large bank deposits from JPMorgan and other big banks in an attempt to head off First Republic's collapse. Those deposits will be repaid post-close or eliminated in consolidation, JPMorgan said. JPMorgan is also buying most of the bank's assets, including $173 billion in loans and $30 billion in securities.
First Republic Bank had approximately $229.1 billion in total assets and $103.9 billion in deposits as of April 13, according to the FDIC.
JPMorgan needed a regulatory waiver to buy First Republic, because it already holds more than 10% of U.S. deposits.
The FDIC estimates the deal will cost the Deposit Insurance Fund roughly $13 billion. The final cost will be determined once the FDIC terminates receivership.
JPMorgan CEO Jamie Dimon said Monday that the "American banking system is extraordinarily sound" and is "getting near the end" of its issues following the First Republic purchase.
A Hit To Bank Earnings
CFRA analyst Alexander Yokum noted that the recent regional bank failures will negatively affect future earnings for the industry. "All the costs of bank failures will be borne by banks and not taxpayers, although we expect banks to indirectly pass along many of these costs to customers through higher fees and higher interest rates on loans," Yokum wrote.
CFRA estimates replenishing the Deposit Insurance Fund could take a 14% chunk out of bank industry earnings over the next year. The firm anticipates a 7% earnings impact over the next two years and a 5% impact over the next three years, respectively.
The earnings hit will be higher for larger banks as they benefited from deposit inflows during the banking crisis.
Eyes On The Fed
Meanwhile, the Fed announced a quarter-point interest rate hike on Wednesday to a range of 5% to 5.25%. The increase was in-line with analyst expectations.
Further increases down the road could spell more trouble for regional banks. Rising interest rates sparked the crisis, causing bond prices and hold-to-maturity treasuries to decline. Massive unrealized losses began mounting for bank investment units that had misjudged the impact of rising interest rates.
And Andrew Krei, co-chief investment officer at wealth management firm Crescent Grove Advisors, told IBD the biggest risk for banks continues to be of deposits fleeing to safer firms or high-yielding alternatives.
Profitability will likely be crimped as banks are forced to raise interest rates on deposit accounts to compete with money market funds. An inverted yield curve, when long-term bond yields fall below those of shorter term issues, makes the dynamic even more painful, according to Krei.
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