After weeks of turbulence that saw the bankruptcies of Silicon Valley Bank and Signature Bank, the banking industry has been relatively calm.
While no one expects an easy time for the sector, signs of steady deposit outflows and relatively flat trading over the past week have prompted Wall Street to look for buying opportunities. Some people do.
Going into the bank earnings season, which starts on April 14, analysts at Hovde Group, which includes CVB Financial (ticker: CVBF), Western Alliance (WAL) and Wintrust Financial (WTFC), said the three banks posted positive earnings in real terms. We focus on offering risk/reward trading. – Off, considering the significant downdraft we’ve seen in recent weeks.
It’s not a controversial call. Western Alliance shares have been particularly volatile over the past month as banks cut their share price in half on fears of deposit flight. CVB and Wintrust’s shares are doing slightly better, down 31% and 21%, respectively.of
SPDR S&P Regional Banking ETF
(KRE) is 38% off last month.
That said, Hovde Group analysts are well aware of the challenges facing banks.
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Hovde Group analyst Ben Gerlinger said: Baronsnoticed that the Western Alliance had become particularly “battlefield stock”.
Among the group, Western Alliance has been particularly penalized, currently trading at 0.9 times tangible book value and 3.6 times expected earnings, both at 2.3 times book value and 5-year averages at 2.3 times earnings. is well below 9.8 times the Analysts are optimistic about the stock, with 87% of analysts surveyed by FactSet still equating the stock to a buy. Gerlinger expects the stock to reach $65 per share. This is almost double the recent trading levels.
CVB’s valuation decline has been less dramatic than that of the Western Alliance. It is currently trading at 2x tangible book value and 8.9x expected earnings, down from historical levels of 2.4x tangible book value and 14.9x earnings.
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Wintrust’s valuation has similarly declined, currently trading at 6.8x futures earnings and 1.2x tangible book value, with a five-year average of 11.6x earnings and 1.4x tangible book value. It is
Given that stocks have fallen dramatically, Gerlinger expects these stocks to be the most profitable, unless earnings are as bad as feared.
“It’s going to be a mystery quarter with lower earnings expectations and higher stock prices,” Garlinger said, adding that recent trading volatility in the sector resembled a “shoot first, ask questions later” pattern. I explained that there is
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There is no doubt that banks’ profitability is deteriorating as they face pressure to pay depositors and the risk of losing deposits increases. Deposit flight also means banks have less low-cost funds to make loans, further squeezing potential profits.
Wall Street isn’t entirely bullish on banks yet, but analysts are increasingly voicing believe the worst is behind them. I was most encouraged by the Federal Reserve data showing that
Christopher McGratti, managing director of Keefe, Bruyette & Woods, said Monday that “retail bank deposits were basically stable (-$1 billion) this week. Outflows normalized and the initial panic subsided. It’s a promising sign that it’s changed,” he wrote.
According to Torsten Srock, chief economist at Apollo Global Management, banks have withdrawn $800 billion in deposits since the Fed began raising interest rates in February 2022, the largest outflow on record. I’m here.
.
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Meanwhile, $600 billion has flowed into money market funds, where savers can get higher yields.
The move isn’t all that surprising this year, according to the New York Fed’s posting on Monday.
Over the past 13 months, the Fed has raised interest rates from near zero to a range of 4.75% to 5%. The Fed’s so-called terminal rate is 5.1%, meaning one more rate hike.
This may be enough to keep deposits and keep the bank’s investors happy.
Write to Carleton English at Carleton.english@dowjones.com.