Are Banks Now a Bargain?

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In The Wall Street Journal, Sam Goldfarb examines the sentiment by some that banks are now trading at bargain prices. He writes:

A growing number of investors are betting on a rebound in the banking sector, wagering that regional lenders are in much better condition than many initially feared after theĀ collapse of Silicon Valley Bank.

Bank shares rallied Monday, while U.S. Treasury prices fell, afterĀ First Citizens BancsharesĀ FCNCBĀ 0.00%increase; green up pointing triangleĀ reached a deal with federal regulatorsĀ to buy large piecesĀ of Silicon Valley Bank. TheĀ run on SVBĀ that started March 9 had sparked a rout in banks and aĀ surge in demandĀ for Treasurys, reflecting fears that trouble in the financial sectorĀ could hurt the broader economy.

Monday’s gain marked the latest sign that Wall Street is warming up to banks again, with their stocks and bonds stabilizing and analysts increasingly emboldened to call bottom on the selloff. Over the past two weeks, there have been no new bank failures, andĀ most of the concernĀ has focused on just one midsize lender,Ā First Republic BankĀ FRCĀ 1.19%increase; green up pointing triangle.

The situation in the banking sector is fluid, and investors broadly remain on edge. Recent Federal Reserve data has shown aĀ sizable shift in depositsĀ from smaller to larger banks, while unnamed banks have alsoĀ rushed to borrowĀ from the Fed, acting out of precaution or financial pressure.

Still, many investors challenge the notion that there is any fundamental, widespread problem on the asset side of bank balance sheets—a view that gives them confidence that deposit flight will abate and thatĀ a still-strong U.S. economyĀ will survive the latest in what has been a string of recession scares.

One of SVB’s problems was that it facedĀ large unrealized losses on its portfolio of government-backed bonds thanks to last year’s jump in interest rates. But no other major bank currently faces nearly the same amount of losses relative to its size, these investors point out. In addition, such bonds are still essentially guaranteed to be paid in full when they mature, and banks can now borrow against them from the Fed at their face value—making them worlds apart from the toxic mortgage assets that sank lenders in the late 2000s.

Investors remain nervous about regional bank stocks, partly because many had doubts about them even before this month, but there is a sense in the market that ā€œsome of these things have taken too much of a beating,ā€ said Brett Rabatin, head of equity research at Hovde Group.

Read more here.

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