Local banks are not bankrupt. Not all is well.


Western Alliance (WAL) lost $6 billion in deposits in the turmoil that roiled the banking industry in the first quarter. Earnings for the Phoenix-based lender fell 41% year-over-year.

Still, its stock price rose 24% the day after these results were announced.

Investors were looking for signs that the crisis that saw three US banks go bankrupt within days in early March was over. They are particularly keen on signals from local banks, most vulnerable to the panic that rippled through the financial system in the weeks that followed.

Reports from more than 15 regional lenders over the past week have shown plenty of these signs, as multiple executives said the deposit outflows they saw in March have since stabilized or even reversed. rice field.

Zach Hill, head of portfolio strategy at Horizon Investments, said last week’s earnings results were “better than we feared.”

The banking crisis “feels largely over,” added Hugh Roberts, head of analytics at Quant Insights.

Wedbush analyst David Chiaverini told Yahoo Finance that the themes that have dominated this quarter’s results so far are “not so scary.”

Western Alliance added $2 billion in deposits in the first two weeks of April.

“The seas have calmed down,” Western Alliance Chief Executive Ken Vecchione told analysts this week.

But that doesn’t mean all is well for many midsize banks that lack the power and diversity of industry giants like JPMorgan Chase (JPM) and Bank of America (BAC). .

Many of these smaller institutions now expect lower loan revenues and higher deposit payments, which has said they have lower expectations of future revenues and profits. Others say tighter federal bank regulation could force them to raise more money.

Brad McMillan, CIO of Commonwealth Financial Network, said: “While some of the pressing issues have been resolved, the reality is that banks’ business models will need to change as interest rates rise, and that It will continue for months, quarters and even years,” he told Yahoo Finance.

high cost, low profit

Their problem begins with deposits, an important source of funding for smaller financial institutions. Even before Silicon Valley Bank went bankrupt, bank customers earning little interest from their accounts began moving their funds to higher-yielding alternatives such as certificates of deposit and money market funds.

The outflow accelerated in March. Comerica (CMA), a local bank in Dallas, said deposits were down 9% in his first three months of the year. Salt Lake City lender Zion’s (ZION) said it was down 3.4%.

As such, many local lenders have been forced to initiate higher payments to retain or draw back depositors. Comerica’s deposit costs increased 2,850% from a year ago to $118 million. At Zions, those costs increased 1,266% to $82 million. Cincinnati lender Fifth Third (FITB) and Cleveland lender Keycorp (KEY) saw increases of 4,245% and 2,400%, respectively.

A view of Comerica Bank's offices in Century City on March 17, 2023 Century City, CA Credit: BauerGriffin/MediaPunch/IPX

Comerica Bank branch. Credit: BauerGriffin/MediaPunch/IPX

These higher costs are in turn beginning to affect a key measure of profitability known as net interest income. and we expect it to decline again in the second quarter of this year as the Federal Reserve keeps interest rates high.

KeyCorp and Fifth Third are among the banks that have lowered their net interest income expectations. Comerica says it expects its numbers to drop 11-13% in the three months ending June 30.

However, Comerica management said it expects some of the lost deposits to be returned. They said much of the outflow in March occurred because longtime customers decided to move their surplus elsewhere. Customers are likely to come back because their relationships are strong.

“I don’t think we need to pay for that,” senior vice president Peter Sefzik told analysts on Thursday.

“There is no danger within our four walls”

Some regional bank executives said concerns about one corner of the industry were exaggerated. After all, recent data show that deposit outflows at banks with assets under his $250 billion have slowed since March. Those financial institutions took him back $20 billion in the two weeks to April 12, according to his Fed data released on Friday.

Fifth Third CEO Tim Spence told analysts on Thursday that his agency is particularly well-positioned given the recent surge in manufacturing jobs across his region of the Midwest. said.

“The market has traded more on narrative than on fundamentals,” he said, adding that “there was no crisis inside our four walls.”

Western Alliance CEO Vecchione admitted depositors withdrew $8 billion from banks in one day in March, but said the deposits were back within a week. After making back $2 billion in his first two weeks in April, he’s expected to earn another $2 billion quarterly this year.

“We are back to a much calmer state than before,” Vecchione said.

Some of this new industry calm may be tested again next week as more local banks report their results. Many investors will pay close attention to his one particular name, First Republic (FRC), which was at the center of last month’s crisis. In March, a San Francisco lender received a $30 billion deposit injection from 11 rival banks to restore confidence.

A lot of money is at stake in that fate. Everyday investors have bet $245 million on First Republic stock since the collapse of Silicon Valley Bank, according to Vanda Research, putting it in second only to Bank of America and Charles Schwab (SCHW). Bank stocks are the third largest inflow. It’s also seen the most interest among so-called short sellers betting on falling stock prices, with such bets accounting for $480 million over the past 30 days, according to analytics firm S3 Partners.

The First Republic “will be a trailblazer in sentiment for the sector,” Vanda said in a note last week.

The Western Alliance CEO told analysts on Wednesday that his bank has now proven to be in a separate category from First Republic.

“There was a point where whatever happened to them would affect us. But I think we separate ourselves now.”

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