Stocks of small US lenders are still in the doldrums nearly a year after the regional banking crisis.
The KBW Nasdaq Regional Banking index, which tracks the performance of regional lenders and thrifts, has fallen more than 2.4% this year compared to the benchmark S&P 500's 2.6% gain.
PNC Financial Services (PNC) shares have declined 2.3%, Comerica Inc (CMA) shares have slipped 1.5% and US Bancorp (USB) shares have fallen 1.1% during the same period.
Regional banks reported fourth-quarter earnings this month that raised concerns that small lenders have yet to recover after overcoming the worst of the industry's turmoil in 2023. KeyCorp's (KEY) net income fell about 92% from a year earlier, Citizens Financial's (CFG) slipped roughly 71%, Huntington Bancshares's (HBAN) declined about 62% and PNC Financial Service's slid around 43%.
Adding salt to the wound, the Federal Reserve said on Wednesday that it is shuttering the Bank Term Funding Program, established after regional banking turmoil last year to help lenders meet their liquidity needs. The program will continue for another couple months, but the interest rates on new loans through the program's expiration on March 11 has been adjusted so that it's no longer lower than the rate on reserve balances.
"This development is likely to … challenge the health of regional banks," wrote José Torres, senior economist at Interactive Brokers, in a note on Thursday.
Regional bank stocks struggled for much of 2023 after the collapses of Silicon Valley Bank and Signature Bank sparked a flight on deposits and sent shockwaves through the stock and bond markets.
Customers yanked their money out of the banks as they worried that a potential credit crunch would prevent them from making good on their deposits — most of which were uninsured. High interest rates threatened to put pressure on regional banks' bond portfolios and squeeze their bottom lines, creating a good old-fashioned bank run.
Eventually, First Republic Bank also collapsed – the second-largest bank failure in history.
Regional bank stocks experienced some reprieve during the late-2023 "everything rally" that saw assets from crypto to gold to stocks race higher as Wall Street grew more convinced that the Fed could lower inflation without the economy slipping into a downturn.
The Fed has penciled in three rate cuts for 2024. While investors were optimistic that the central bank would begin easing rates in March, that hope has faded somewhat in light of hot economic data and warnings from Fed officials about cutting too soon.
But Alex McGrath, chief investment officer at NorthEnd Private Wealth, said that the Fed's decision to close its rescue program for regional banks, especially after they reported a difficult quarter, suggests rate cuts could still begin in March.
"I can't imagine a situation where the Fed would go make that kind of action without knowing what was right behind it," said McGrath.
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