Five reasons why regional bank stock investors are worried

Published Wed, May 3 20238:37 AM EDT

At the BTIG Charity Day yesterday, where dozens of celebrities and market watchers gathered to support their favorite charities, the hot topic among the cognoscenti was, "What's up with the banks again?" Many regional banks, like Zions, KeyCorp and US Bancorp, were trading at their lowest levels since the Great Financial Crisis in early 2009. One thing everyone seemed to agree on: the current concerns are much broader than deposit flight . The concerns have expanded to include higher deposit costs in general, less lending (particularly in commercial real estate), more regulation and, most importantly, credit issues down the road. Below is a compendium of various observations made to me by traders, analysts and market observers throughout the day. The big issue is credit. Repricing of commercial real estate (CRE) loans is a major issue, given how top-heavy many regional banks are in this space. One observer at the conference put it this way: many CRE loans are intermediate term (5 years) and floating rate. The old rate was roughly 4%, but new floating rates are closer to 9%. This is not an imminent credit crunch, but it may be enough to cause serious problems down the road. Specifically, the higher rates may not make any sense for borrowers, or the banks are going to have less appetite to lend because the risk will be much higher for them, particularly for office buildings. This is going to translate into higher pricing for the marginal borrower, or no access to credit for the marginal borrower. Deposits are still flowing out of the system. Over the course of the last several weeks, depositors have fled the system or moved to the largest handful of banks, most specifically JPMorgan. So, to the extent that they've stayed in the system, they've gravitated mostly towards the largest banks but, in vast numbers, often JPMorgan. And investors are asking, how does anyone get to compete with the biggest guys and especially JPMorgan these days? Investors are bracing for potentially higher capital and liquidity rules for large banks. This is the fallout from the banking crisis. Put it all together: you have lots of earnings headwinds. You've got a lot of selling pressure, but not a lot of reasons to buy. "Owners of bank stocks are asking, 'Why am I here?,'" one bank analyst who asked to remain anonymous told me. "A lot of investors are just sort of saying I need to be compensated more," he said, noting that investors have received poor returns on banks for more than a decade. He has a point: the SPDR Regional Bank ETF (KRE), a basket of large regional banks, began trading in mid-2006. Since then, it is down 20%. You heard right: a basket of regional banks is 20% lower than 17 years ago. They never recovered from the Great Financial Crisis. The S & P 500, by contrast, is up more than 230% since then.