Community bank stocks mount relief rally

THATSAPHON/pookpiik - stock.adobe.com

U.S. community and regional banks are rallying this week amid bargain buying, optimism that the recent crisis has eased, the potential for policymakers to pause interest rate hikes and a possible return of steady mergers-and-acquisition activity later this year or next.

"Yes, it's a relief rally, but I also see there is still a lot of long-term value in banks," Robert Bolton, president of bank investor Iron Bay Capital, said in an interview.

At the end of regular trading Wednesday, the KBW Nasdaq Bank Index was up nearly 5% from Monday's close. The S&P SmallCap Banks Index was ahead even more in the same span. Both reached the highest levels since April, just prior to the downfall of First Republic Bank on May 1. That followed the failures of Silicon Valley Bank and Signature Bank and renewed downward pressure at the time on bank stocks amid contagion concerns.

The failures had been hastened in part by runs on the banks' deposits. Other companies across the sector saw competition for deposits and funding costs jump in the wake of regulators shuttering the vulnerable regional banks.

However, most banks have since reported deposit stability, and this has been reflected in weekly Federal Reserve data. While loan growth is slowing this year because of high interest rates and recession worries, other bank fundamentals are strong. Credit quality remains solid and capital levels are robust on average across the industry, suggesting that even if an economic downturn develops, most banks will have the wherewithal to navigate it successfully.

Against that backdrop, more investors are viewing bank stocks as bargain buys and are beginning to get back into the sector, Bolton said.

"I think what we had was misplaced fear," he said of the recent bank stock slump. "It was fear, not fundamentals, and as the days go on, the fear clouds are receding."

Additionally, headwinds caused by 10 Fed interest rate hikes over the past 15 months to combat inflation may abate. Fed policymakers suggested ahead of their June meeting next week that they may pause their tightening campaign and leave rates steady to start the summer. Borrowing costs would remain high, but at least there is a sign the upward trend may soon taper, Bolton said.

Community banking

M&A stagnates, but regulatory resistance may ease

June 6, 2023 2:38 PM

What's more, M&A activity that slowed to a crawl early in 2023, in part because of the Biden administration's call for greater scrutiny of deals, could pick up later this year or next, providing a future bank stock catalyst for long-term investors.

Jacob Thompson, managing director of investment banking at Samco Capital Markets, said in an interview that, in the aftermath of the failures, regulators have signaled that they would prefer strong banks to pursue traditional acquisitions rather than risk more consolidation via failed bank deals. This could pave a path for more accommodating regulatory reviews and M&A activity broadly, he said.

"We're seeing some meaningful changes in tone," Thompson said.