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Are Banks Now a Bargain?

March 28, 2023 By The Editors

By globe_design_studio @ Shutterstock.com

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 the collapse of Silicon Valley Bank.

Bank shares rallied Monday, while U.S. Treasury prices fell, after First Citizens Bancshares FCNCB 0.00%increase; green up pointing triangle reached a deal with federal regulators to buy large pieces of Silicon Valley Bank. The run on SVB that started March 9 had sparked a rout in banks and a surge in demand for Treasurys, reflecting fears that trouble in the financial sector 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, and most of the concern has focused on just one midsize lender, First Republic Bank FRC 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 a sizable shift in deposits from smaller to larger banks, while unnamed banks have also rushed to borrow 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 that a still-strong U.S. economy will survive the latest in what has been a string of recession scares.

One of SVB’s problems was that it faced 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 “some of these things have taken too much of a beating,” said Brett Rabatin, head of equity research at Hovde Group.

Read more here.

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