Quick Hit: The US Banking Sector in Two Charts

Editors’ Note: MarketMinder doesn’t make individual security recommendations. The below are merely incidental to a broader theme we wish to highlight.

Regional banking fears are stirring anew in the wake of some high-profile earnings disappointments that loosely tie to commercial real estate, fueling chatter that stocks face a new threat investors are blind to. Yet if you know where to look, it becomes clear stocks are already dealing with these issues and telling us they are isolated and company-specific, not market-wide.

To see regional bank issues register in stock returns, you have to look in the places where they are most pronounced. That isn’t the S&P 500 or even its Financials sector. The latter includes some large regional banks, but the megabanks’ market cap dwarfs their influence on returns. Hence, you will get a better view from the KBW Nasdaq Regional Banking Index and the S&P 600 Small Cap Index’s Financials sector.

Exhibit 1 presents these alongside S&P 500 Financials as a sort of control group. We started it at the beginning of 2023 so that you can see how it diverged from the more regional bank-heavy indexes during last spring’s regional banking crisis. Note this divergence has reappeared lately, with large Financials rising while the regional banks hit tough sledding.

Exhibit 1: Regional Banks’ Tough Road

Source: FactSet, as of 2/7/2024. KBW Nasdaq Regional Banking Index, S&P 500 Financials and S&P 600 Small Cap Financials total returns, 12/31/2022 – 2/6/2024. Indexed to 100 at 12/31/2022.

Exhibit 2 gives you a more focused look at the last three months. There, you will see regional banks bouncing sharply from last year’s correction, then bouncing sideways before having a very tough time last week as markets grappled with Signature Bank absorber New York Community Bancorp’s (NYCB’s) big Q4 earnings miss and weak 2024 guidance. Yet the S&P 500 Financials sector held steady, sending a strong signal that one bank’s problems aren’t poison for the entire US banking realm. To us, it looks like bigger banks have basically looked at recent headlines with a pronounced yawn.

Exhibit 2: Regional Banks’ Tough January in Focus

Source: FactSet, as of 2/7/2024. KBW Nasdaq Regional Banking Index, S&P 500 Financials and S&P 600 Small Cap Financials total returns, 10/31/2023 – 2/6/2024. Indexed to 100 at 10/31/2023.

This seems rational. We won’t get into NYCB’s idiosyncrasies in detail, but the tough results are a legacy of its absorbing Signature Bank. This, coupled with another recent merger, made NYCB big enough that it will soon face tougher capital requirements, putting some lower-quality commercial loans on its balance sheet in the spotlight and forcing it to build liquidity to meet the more stringent rules. It is a situation unique to one company that had an interesting couple of years, not a sign of trouble looming nationally. It is arguably more a ripple stemming from last spring’s events than something truly new.

So no, markets aren’t whistling past the graveyard. They are assessing problems where those problems lurk and not extrapolating them further. This is normal, healthy market behavior. There are always struggling companies and pockets of weakness, even in good times. If markets were really complacent, then regional bank stocks would be looking through the last week’s news, too. Instead, they are discounting it, as we would expect, and showing the truly limited impact.