Regional Banks Face Chain Bankruptcy Risk, Stocks Plunge
Profitability Expected to Improve Amid Fed Rate Cut Hopes
US bank stocks, which faced a crisis last March due to the bankruptcy of regional banks such as Silicon Valley Bank (SVB), are gaining attention again. Since the Federal Reserve (Fed) is expected to start cutting interest rates this year, profitability could improve, indicating ample potential for stock price increases.
Last year, US bank stocks experienced a rollercoaster ride. In March, starting with SVB, a series of regional banks including Signature Bank went bankrupt, spreading a sense of crisis and causing stock prices to plummet. Then, from late October, when expectations grew that the Fed would stop raising interest rates and begin cutting them, the stocks started to rebound. As a result, while the S&P 500 index surged 24% in the US stock market last year, the S&P 500 Financials sector (SPSY) only rose 9.5%. SPSY closed at 629.11 on the 11th (local time), showing a 0.4% increase since the beginning of the year.
Investors are closely watching the fourth-quarter earnings of major banks such as JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo, which will be announced on the 12th. On the 16th, earnings reports from Morgan Stanley and Goldman Sachs will follow. Given the increased funding costs for major banks due to financial market uncertainties, earnings are expected to be somewhat weak. Analysts attribute this to reduced net interest income caused by decreased loan demand amid sustained high interest rates, as well as lower transaction revenues from activities like initial public offerings (IPOs). Additionally, Citigroup is expected to incur $1.7 billion to replenish the Federal Deposit Insurance Corporation (FDIC) fund, which was depleted due to regional bank failures.
Wall Street experts advise focusing more on outlooks than on the actual bank earnings. Expectations are growing that the Fed will cut interest rates three or more times this year, easing concerns about a bank-driven financial crisis. Once the rate-cutting phase begins, banks’ net interest margins are likely to increase, improving earnings. Furthermore, the risks of setting aside large loan loss provisions or writing off securities will significantly decrease.
It is also assessed that the stock price gains of small regional banks, which experienced large declines last year, could be even greater. There is speculation that these banks could benefit from a spillover effect as US financial regulators are considering tightening regulations on large banks with assets exceeding $100 billion.
Goldman Sachs analyst Richard Ramsden said, "Bank stocks are not as cheap as they used to be, but at the same time, I don’t think bank stocks are too expensive."
However, caution remains. Inflation rates still exceed the Fed’s target of 2%, and the Consumer Price Index (CPI) rose 3.4% year-over-year in December last year, surpassing market expectations. While the market is still betting on a possible rate cut in March, the later the rate cut occurs, the greater the burden on banks.
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