Some investors see a bargain in potential US regional bank recovery

Some investors are starting to spot bargains among regional lenders, who were caught in the market chaos following the collapse of Silicon Valley Bank, according to portfolio managers and traders.

KBW’s regional banking index has fallen more than a quarter since the start of the year, with the collapse of SVB and smaller peer Signature Bank prompting a reckoning across the financial sector in the US and abroad.

However, the index has shown tentative signs of stabilizing over the past few weeks, posting two consecutive weeks of gains for the first time since early February. The KBW Regional Banking Index has returned 11 percent from its year-to-date nadir in early May.

The calm is attracting the attention of some investors, who have started repositioning their positions in the sector. Phil Stone, managing partner at Forthstone, which specializes in investing in US financials, said his fund had been defensive for the past 18 months due to recession fears, but was now a “high confidence buyer”.

“The prices are some of the most attractive we’ve seen in years,” Stone said, comparing valuations to those after the 2008 financial crisis.

Still, many are wary of getting back into this area too quickly.

“A lot of these banks are trading cheap,” said Remi Olu-Piton, a multi-asset fund manager at Schroders. “But however cheap they are, they can be cheap. The valuation signal is there but we don’t have that catalyst (to buy) yet. I think it will come in the second half of the year.”

George Patterson, chief investment officer in PGIM’s quantitative investment arm, agreed that “there are probably some great opportunities in regional banking because I think everybody got nervous” after SVB’s collapse. But he stressed the need for patience. “We’re never trying to call down. . . I don’t think we’re ready to increase positions right now.”

Patterson’s outlook was typical of many investors, according to sector analysts and trading desks. Ibrahim Poonawalla, head of research for North American banks at Bank of America, said: “We’re seeing . . . a lot of pencil sharpening, checking and digging in at individual companies” as fears of immediate contagion risk rise.

However, he added that the fundamental outlook for many regional banks remains weak, with challenges including a potential recession, an inverted yield curve that weighs on profit margins, and concerns about the health of the commercial property sector.

Forthstone’s Stone said concerns about regional banks’ exposure to commercial real estate were exaggerated, arguing that it represented a small portion of total loans for most lenders. He also pointed out that for smaller banks, office lending tends to include basic community businesses like doctor’s offices and insurance agencies, rather than city center monoliths.

“Office is so finicky. Some community and regional banks have 70-story towers that people fantasize about,” he said.

Greg Hertrich, US head of depository strategies at Nomura, said regional bank management teams were working to reassure investors that they had responded to concerns raised by the earlier collapse. But he said many investors would await further evidence from the second-quarter earnings report in July.

The speed of the SVB collapse in March was unprecedented, as social media and online banking allowed concerns – and withdrawals – to spread quickly. However, any recovery is unlikely to come at the same pace.

“The sector is probably at a point where there is less existential risk,” Hertrich said, “but banking has not, historically, been a sector that turns on the proverbial dime.”

Some investors are starting to spot bargains among regional lenders, who were caught in the market chaos following the collapse of Silicon Valley Bank, according to portfolio managers and traders.

KBW’s regional banking index has fallen more than a quarter since the start of the year, with the collapse of SVB and smaller peer Signature Bank prompting a reckoning across the financial sector in the US and abroad.

However, the index has shown tentative signs of stabilizing over the past few weeks, posting two consecutive weeks of gains for the first time since early February. The KBW Regional Banking Index has returned 11 percent from its year-to-date nadir in early May.

The calm is attracting the attention of some investors, who have started repositioning their positions in the sector. Phil Stone, managing partner at Forthstone, which specializes in investing in US financials, said his fund had been defensive for the past 18 months due to recession fears, but was now a “high confidence buyer”.

“The prices are some of the most attractive we’ve seen in years,” Stone said, comparing valuations to those after the 2008 financial crisis.

Still, many are wary of getting back into this area too quickly.

“A lot of these banks are trading cheap,” said Remi Olu-Piton, a multi-asset fund manager at Schroders. “But however cheap they are, they can be cheap. The valuation signal is there but we don’t have that catalyst (to buy) yet. I think it will come in the second half of the year.”

George Patterson, chief investment officer in PGIM’s quantitative investment arm, agreed that “there are probably some great opportunities in regional banking because I think everybody got nervous” after SVB’s collapse. But he stressed the need for patience. “We’re never trying to call down. . . I don’t think we’re ready to increase positions right now.”

Patterson’s outlook was typical of many investors, according to sector analysts and trading desks. Ibrahim Poonawalla, head of research for North American banks at Bank of America, said: “We’re seeing . . . a lot of pencil sharpening, checking and digging in at individual companies” as fears of immediate contagion risk rise.

However, he added that the fundamental outlook for many regional banks remains weak, with challenges including a potential recession, an inverted yield curve that weighs on profit margins, and concerns about the health of the commercial property sector.

Forthstone’s Stone said concerns about regional banks’ exposure to commercial real estate were exaggerated, arguing that it represented a small portion of total loans for most lenders. He also pointed out that for smaller banks, office lending tends to include basic community businesses like doctor’s offices and insurance agencies, rather than city center monoliths.

“Office is so finicky. Some community and regional banks have 70-story towers that people fantasize about,” he said.

Greg Hertrich, US head of depository strategies at Nomura, said regional bank management teams were working to reassure investors that they had responded to concerns raised by the earlier collapse. But he said many investors would await further evidence from the second-quarter earnings report in July.

The speed of the SVB collapse in March was unprecedented, as social media and online banking allowed concerns – and withdrawals – to spread quickly. However, any recovery is unlikely to come at the same pace.

“The sector is probably at a point where there is less existential risk,” Hertrich said, “but banking has not, historically, been a sector that turns on the proverbial dime.”