The financial sector has been churning in rough water since the shocking collapse of Silicon Valley Bank in March.
Now, it appears that two factions on Wall Street, fear-motivated short-sellers and value-based fundamental investors, are locked in a volatile battle over where the sector's stock prices should settle.
A look back: Last week was rough on US regional banks — shares of mid-sized lenders got crushed as the sale of First Republic Bank and other news triggered fears that the crisis in the sector was far from over.
PacWest shares lost half their value on Thursday after the California-based lender said it was exploring all strategic options (that means "looking for help" in Wall Street speak). Shares of Arizona's Western Alliance finished down 39% even after the company denounced a Financial Times report claiming it was considering a sale. Utah's Zions and Texas' Comerica also toppled more 12%.
But a sudden rebound jerked stocks higher on Friday; PacWest skyrocketed a staggering 82%. The momentum lasted through the weekend: Shares of First Republic closed 13% higher on Monday. Western Alliance and Zions were also up for the day — they're still trading at bargain-basement prices, down 54% and 51% this year, respectively. But they're definitely on a roller-coaster ride.
So what happened?
Meme stock-ing: Some analysts are blaming the wild swings on skittish investors trading on fear and momentum, instead of on fundamental values.
"We believe regional banks are suffering from a GameStop-like moment where misinformation circulating on social media is fueling stock price declines that threaten funding and solvency," Jaret Seiberg, financial services analyst at TD Cowen Washington Research Group, wrote in a note to clients on Thursday.
The Biden administration has pointed fingers at short-sellers who bet against the banks and profited when they fell. White House Press Secretary Karine Jean-Pierre told reporters during Thursday's press briefing that the administration is "going to closely monitor the market developments, including the short selling pressures... on healthy banks."
Securities and Exchange Commission Chair Gary Gensler said in a statement that his agency is focused on finding "any form of misconduct" that threatens investors and capital markets.
Value first: Meme-stockification could be the reason that investors dumped these shares, but strong fundamentals are the reason they've been able to rebound quickly. No one is going to confuse the regional banks with JPMorgan anytime soon — but they're not Silicon Valley Bank or even First Republic, either: deposits are steady, and their earnings reports showed promise.
Bank insiders see this and have been buying up shares of regional lenders, according to a report by Timothy Coffey, an analyst at Janney Montgomery Scott.
According to Coffey's analysis, 53 banking insiders across 18 financial institutions have purchased 334,000 shares worth more than $6 million since March 10, when SVB collapsed.
"Insider purchases of their own stock can be a bullish indicator," wrote Coffey. "In our opinion, these purchases during extreme market volatility should be interpreted as signs of strength and applauded."
Investors pay close attention when executives purchase shares of their own company, typically considering it a vote of confidence.
JPMorgan analyst Steven Alexopoulos is also optimistic about the future of regional banking stocks. In a note on Friday, he upgraded Western Alliance and Comerica banks to overweight from neutral, and upgraded Zion Bancorp to overweight from underweight.
First-quarter earnings for regional banks weren't as bad as analysts had feared, he wrote, and "with sentiment this negative, in our view it won't take much to see a significant intermediate-term favorable re-rating of regional bank stocks."
Alexopoulos said his team sees the potential for big regulatory changes including increased FDIC insurance levels, a ban on short-selling, and a Fed pivot away from raising interest rates. Those are all good things for regional banks.
"In the meantime, we see the favorable updates coming from select banks that deposit balances have remained stable (or increased) helping to counterbalance very negative sentiment," they said. "For investors looking to rebalance portfolios, many high quality banks look attractive."
What comes next: A surge of further bank failures is highly unlikely, but that doesn't mean the financial sector is going to thrive, either.
Banks will have to hike their interest rate payouts to attract wary depositors, said Simeon Hyman, global investment strategist at ProShares. That will limit their profitability.
Warren Buffett also seeded some doubt during his annual Berkshire Hathaway shareholders' meeting at the weekend. The Oracle of Omaha said he remains cautious about holding bank stocks and that he has reduced his own exposure to the sector.
"The incentives in bank regulation are so messed up and so many people have an interest in having them messed up," he said "It's totally crazy."
It's not just regional lenders; large cap banks are feeling the pain too. Since March 9, the day before Silicon Valley Bank's fall, the S&P 500 is down by about 3.3%. The S&P 500 financial sector, however, is down more than 12% over the same period.
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