Source: Zhitong Finance

The panic sell-off triggered by the banking crisis has caused the market value of some banks in the US, especially small and medium-sized banks in the US region, to shrink by half. According to trading practices, this seems like an excellent opportunity to buy these bank stocks on dips. However, the fundamentals of these banks seem to be deteriorating further, and investors still generally lack confidence in US regional banks.

The Zhitong Finance App has learned that some data shows that as Bank of America stocks have been falling for four consecutive weeks, bullies seem to be showing signs of losing. Bank of America (Bank of America) strategists quoted EPFR Global data as saying that in the week ending May 10, investors withdrew a total of about 2.1 billion US dollars from financial stocks, the largest since May 2022.

Statistics from Refinitiv Lipper show that some exchange-traded funds (ETFs) focusing on the US financial industry experienced the largest outflow of capital since September last year. The financial industry's selected SPDR fund (code: XLF), which is worth more than $29 billion, has had outflows of more than $2 billion in the past two weeks alone.

Driven by the “mentality of the crowd”, investors have turned bearish on bank stocks

This retreating sentiment could prolong the rout caused by the collapse of Silicon Valley Bank (Silicon Valley Bank) and two other regional US banks in the past two months. As the Federal Reserve's most aggressive interest rate hike cycle in decades made waves in the US economy, the wave of bank failures raised deep fears that as borrowing costs rise and investment losses continue to rise, more banks will be similarly hit.

The wave of bank stock sell-offs has brought confidence to those who focus on shorting, and has made regional banks in the US one of the hardest hit sectors in the US stock market this year. Since the beginning of March,$Western Alliance Bancorp (WAL.US)$,$Zions Bancorp (ZION.US)$,$Comerica (CMA.US)$with$KeyCorp (KEY.US)$The stock prices of other regional banks have all fallen by at least 50%. Of the 10 worst performing constituent stocks in the S&P 500 index this year, 8 were only financial stocks. ranging$JPMorgan (JPM.US)$,$Goldman Sachs (GS.US)$with$Wells Fargo & Co (WFC.US)$The KBW Bank Index, which includes international financial giants, has plummeted by about 28% since this year.

However, Ben Gerlinger, an analyst from Hovde Group, has always insisted that the decline in stock prices of banks such as Allians Western Bank is irrational and unreasonable, saying that Allianz Western Bank is in a better position than its peers. However, he said that stock trading showed a “crowd mentality” and investors turned bearish on bank stocks one after another.

Furthermore, now that financial markets have extremely little confidence in bank stocks, the US banking industry is facing a negative feedback cycle. After negative news or rumors appeared, the stock prices of some small to medium banks fell, triggering more media news and discussions. This in turn triggered a rush of depositors at these banks.

The market is worried that small to medium banks that lack investor confidence, such as Alliance Western Bank, may repeat the failure of First Republic Bank. A steady stream of negative news will force savers to react negatively, and once their confidence in banks is shattered, it will be difficult to recover. Although Alliance Western Bank previously denied the negative news, the bank has been closely watched by bears, so these small to medium banks, which have already been pushed to the forefront, are clearly in a very disadvantageous position.

“Investors' confidence that bank crowding will stop is generally very low.” Gerlinger said, however, that the data showed that overall deposit outflows from regional banks had been relatively moderate, and most of the concerns were superfluous. The analyst rated Alliances Western Bank as “outperforming the market,” and expects the bank's stock price to roughly double next year.

US regulators are also trying to instill sufficient confidence in the US banking industry. Federal Reserve Chairman Powell insisted that after First Republic Bank was acquired and sold to JPMorgan Chase (JPM.US), the US banking system was “stable and resilient.”

However, this doesn't seem to appease investors' concerns about a series of negative forces squeezing the banking industry. These include pressure to raise interest rates on deposits to stop cash flow to higher-yielding money market funds; bank portfolio losses valued at market value under heavy pressure from the Federal Reserve's interest rate hike; and if the global economy shrinks and office vacancy rates remain high, the risk of small business and commercial real estate loan defaults will rapidly increase.

US regional bank stocks have been hit hard, and those who believe in “buying on dips” have gradually lost their fighting spirit

“Historical data shows that you can't see and smell this much smoke, then it shows everything is fine.” Ann Miletti, head of stock investment from Allspring Global Investments, said.

When the turmoil in the US banking industry first broke out in early March, there were some signs that investors were trying to achieve quick profits through the “buy on dips” strategy — a strategy that proved profitable during the bull market period during the COVID-19 pandemic, as well as during most periods of sharp declines in US stocks across the board. The same was true in the early days of this banking crisis. The financial industry selected the SPDR ETF fund, which absorbed about 1.2 billion US dollars in capital within a week of mid-March.

However, the latest stock market data proves that this optimistic “buy on dips” strategy is out of place. These regional bank stocks failed to rebound as expected, making investors hesitant whether to try buying again. Take the SPDR S&P Regional Bank ETF (code: KRE) as an example: Since March, the fund has experienced a one-day decline of at least 5% six times. However, according to an analytical data from Bespoke Investment Group, the median decline of the ETF announced by the index company was still as high as 2% in the weeks that followed. Meanwhile, the KBW Bank Index, which tracks 21 banks, has fallen by more than 33% since the beginning of March.

Paul Hickey, co-founder of Bespoke, said, “Although investors have been choosing to buy on dips when the US stock market falls this year, they are not keen to buy regional US bank stocks now.”

The continuing sharp blows have drastically reduced the overall valuation level of regional bank stocks. According to data compiled by institutions, the price-earnings ratio of stocks in the KBW benchmark index is about 7 times, which is less than half of what it was at the end of 2020. At the same time, the price-earnings ratio of the S&P 500 index is close to 19 times. Even so, some investors are unconvinced that the stock prices of these regional banks will not fall further.

“America's regional banking model has structural weaknesses. They can't rely entirely on their own deposit base, so how can they issue attractive loans and create the net interest spreads they need?” David Neuhauser, founder and chief investment officer of the well-known hedge fund Livermore Partners, said in an interview. “It's a combination of the business model and environment, yet both are extremely uncertain.” “Therefore, judging from the current situation, it's hard to say that this industry is worth buying for investors.” Neuhauser added.

Editor/jayden