JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon said, “This part of the crisis is over,” after the leading bank took over the deposits and most of the assets of embattled First Republic following its seizure by regulators. However, the steep decline in the stocks of regional banks on Tuesday reflects that fears of a potential banking crisis continue to haunt investors.
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Regional banks PacWest Bancorp (PACW), Western Alliance (WAL), Comerica (CMA), and Zions Bancorporation (ZION) plunged nearly 28%, 15%, 12%, and 11%, respectively, on Tuesday. The KBW regional banking index (KRX) fell 5.5%, reaching the lowest level since November 2020. Stocks of larger banks were also down, but not as much as regional banks.
Overall, the decline in regional banking stocks, the upcoming interest rate increase, and concerns over the U.S. government running out of cash without a debt ceiling hike pulled down major stock indices on Tuesday.
Fears Over Further Turmoil
First Republic was the third bank that was seized by the FDIC this year, following the debacle of Silicon Valley Bank (SVB) and Signature Bank. First Republic lost $100 billion in deposits since the SVB fiasco on March 13. While many assured that the takeover of First Republic by JPMorgan would mark the end of the crisis, others opined that the turmoil is not over yet.
“There are only so many banks that were offsides this way,” said Dimon on Monday. “There may be another smaller one, but this pretty much resolves them all.” The subtle warning about another possible collapse of a smaller player seems to have a negative impact on the sentiment around regional banks.
In an interview with YahooFinance at the Milken Institute Global Conference on Monday, Citigroup CEO Jane Fraser expressed relief over JPMorgan’s purchase of First Republic and stated that it was the “last remaining main uncertainty” about a small number of banks that failed at asset-liability management and also suffered due to the steepest interest rate curve seen in 40 years. Fraser further assured that the overall the U.S. banking system is strong, safe, and “the envy of the world.”
However, some executives and experts at the Milken conference indicated that the crisis was far from over. David Hunt, president and CEO of top assets manager PGIM, cautioned that the drama might be just starting.
Hunt feels that the recent turmoil will result in “real ratcheting-up of regulation” in the banking space, mainly on regional banks, which could constrain lending and pose more challenges for businesses relying on regional banks for finance.
It’s worth noting that there are growing concerns about the significant exposure of regional banks to commercial real estate loans. The commercial real estate sector has been hit by rising interest rates and the decline in demand for office space due to the rise in remote and hybrid working. A recent report by JPMorgan Private Bank noted that small banks have 4.4 times higher exposure to U.S. commercial real estate loans compared to their larger peers.
Meanwhile, banks continue to face deposit outflows as customers shift their funds from checking accounts to high-yielding investments. Many banks, including PacWest and Western Alliance, saw their deposits decline in Q1 2023 compared to Q4 2022 after the collapse of two regional banks and due to the shift to higher return products like money market funds. Nonetheless, several banks have assured that deposits have stabilized in April after the outflows seen in Q1 2023.
Conclusion
Investors continue to worry about the fate of regional banks due to rising interest rates, macro pressures, and higher exposure to commercial real estate loans. The significant decline in regional bank stocks even after JPMorgan Chase’s purchase of First Republic indicates that banking crisis concerns persist.
