Some investors see good business in U.S. regional banks’ takeover attempt

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Some investors are starting to look for bargains among regional lenders that have been caught up in the market chaos following the collapse of Silicon Valley Bank, portfolio managers and traders say.

The KBW Regional Banks Index has fallen by more than a quarter since the start of the year, with the collapse of SVB and the smaller Signature Bank, prompting the financial industry in the United States and abroad to make accounts.

However, the index has shown tentative signs of stabilizing in recent weeks, posting two consecutive weeks of gains for the first time since early February. The KBW Regional Banking Index has recovered 11% from its nadir since the start of the year in May.

The calm is attracting the attention of some investors, who have started to rebuild their positions in the sector. Phil Stone, managing partner of Fourthstone, which specializes in investing in U.S. financials, said his funds had been defensive over the past 18 months due to recession fears, but were now “strong buyers”. conviction”.

“Some of the prices are the most attractive we’ve seen in years,” Stone added, comparing valuations to the aftermath of the 2008 financial crisis.

However, many are reluctant to dive back into the sector too soon.

“A lot of these banks are trading very cheaply,” said Remi Olu-Pitan, multi-asset fund manager at Schroders. “But even if they are cheap, they could become cheaper. The valuation signal is there but we don’t have that catalyst [to buy] just now. I think that will come around the second half of the year.

George Patterson, chief investment officer of PGIM’s quantitative investment arm, agreed that “there are probably great opportunities in regional banks because I think everyone had panicked” in the wake of the collapse. from SVB. But he insisted on the need to be patient. “We never try to call the bottom. . . I don’t think we’re quite yet [ready to be] to increase posts.

Patterson’s view was typical of many investors, according to industry analysts and trading desks. Ebrahim Poonawala, head of North American banking research at Bank of America, said: “We are seeing. . . lots of sharpening, probing and digging into individual businesses” as fears of an immediate contagion risk fade.

However, he added that the fundamental outlook for many regional banks remained weak, with challenges including a potential recession, an inverted yield curve that tends to weigh on profit margins and concerns over the health of the banking sector. commercial real estate.

Fourthstone’s Stone said concerns about regional banks’ exposure to commercial property were overblown, saying it represented a small fraction of total lending for most lenders. He also pointed out that for smaller banks, office lending tends to involve grassroots community businesses such as doctors’ offices and insurance agencies, rather than downtown monoliths.

“Office is so granular. Few community and regional banks have the 70-story towers that people envision,” he said.

Greg Hertrich, U.S. head of deposit strategies at Nomura, said regional bank management teams had been working to reassure investors that they had addressed concerns raised by previous meltdowns. But he said many investors would wait for further evidence from second-quarter earnings reports in July.

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

“The industry is probably at a point where there are fewer existential risks,” Hertrich added, “but banking is not, historically, a penny-spinning industry.”