The Federal Deposit Insurance Corp. quarterly banking profile showed some signs of stability following the March panic. But the regulator reported there's still plenty of risks ahead for the sector, and the full impact from the string of bank failures is still unknown. Bank stocks from PacWest Bancorp to Wells Fargo tumbled Wednesday after the FDIC release.
"The banking industry continues to face significant downside risks from the effects of inflation, rising market interest rates, slower economic growth, and geopolitical uncertainty," FDIC Chairman Martin Gruenberg wrote in a statement. Gruenberg warned credit quality and profitability may weaken due to the risks, and may cause less loan underwriting, slower loan growth, higher provision expenses and liquidity constraints.
Gruenberg noted that commercial real estate portfolios, particularly loans backed by office properties, will face challenges if office space demand remains weak and property values keep softening. The FDIC will continue supervising these matters, he wrote.
The FDIC report showed some signs of stability. The banking industry's net income was $79.8 billion for Q1, up $11.5 billion from Q4 but roughly flat excluding gains from failed bank acquisitions. Gruenberg noted that's still "relatively high by historical measures," and was a 13.8% increase from Q1 2022.
The FDIC Deposit Insurance Fund (DIF) balance stood at $116.1 billion as of March 31, down $12.1 billion from the end of the fourth quarter. The reserve ratio, or fund balance relative to insured deposits, decreased by 14 basis points to 1.11%.
Unrealized losses on available-for-sale and held-to-maturity securities improved to $515.5 billion from $617.8 billion in Q4. Gruenberg warned the elevated level may hinder future earnings.
"However, these results ... include the effects of only a few weeks of the industry's stress that began in early March, rather than over the course of the entire quarter," Gruenberg wrote. "The more lasting effects of the industry's response to that stress may not become fully apparent until second quarter results."
On May 1, JPMorgan Chase bought up most of First Republic, which was seeing a massive deposit flight. That followed the March seizures of SVB Financial and Signature Bank.
FDIC Report Hits Bank Stocks
The SPDR S&P Regional Banking ETF retreated 3.3% Wednesday following the FDIC release.
Regional banks Zions Bancorp and PACW stock both fell 5.6% during trading. KeyCorp tumbled 5.9% while Comerica swung 4% lower.
The Financial Sector SPDR ETF, which includes banking giants and other financials such as Visa and Berkshire Hathaway, slumped 1.1% during trading.
JPM stock sank 1.3%, Bank of America fell 1.7% and Wells Fargo retreated 2.9%.
Investment banking giants Morgan Stanley, Goldman Sachs faded 2% and 2.1%, respectively.
Morgan Stanley Co-President Andy Saperstein noted the firm's trading revenue will decline notably compared to Q2 last year. "Sales and trading is soft this quarter. Client activity is muted," he said at the Bernstein Strategic Decisions Conference. Despite investment banking being "very challenged," Saperstein is confident about 2024 as "deals are delayed, they're not dead."
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