2024-01-26 11:44:45 ET
Summary
- Regional banks have been negatively impacted by the rapid rate hike cycle, leading to potential losses on treasury portfolios and increased funding costs.
- The SPDR® S&P Regional Banking ETF has underperformed larger cap banks and the broader market since its inception.
- Consensus estimates indicate a weak operating scenario for regional banks in 2024, with declining revenue and earnings. M&A may be necessary for higher valuations.
Summary
Before the Fed's very rapid rate hike cycle, regional banks were viewed as beneficiaries of a more normal and far slower tightening cycle, with the rationale being that rates on credit would rise sooner and faster than funding costs, leading to expanding NIM (net interest margin) and EPS. However, two factors derailed this thesis, and both are linked to the speed of the rate hikes. The first is the ease with which depositors can transfer cash to money markets that offer ever-climbing risk-free rates not seen in 20 years. The second is the massive potential losses on the treasury portfolios that nosedived as rates jumped, which cut into liquidity and prompted the bailout in 2Q23. It was a perfect storm and one that will likely be felt further in 2024....
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KRE: Squeezed For Longer