Traders Scorched By Cratering Bank Stocks Rush For The Exits

The recent stock-market downturn, fueled by fear and resulting in significant declines for some banks, may appear to present an opportune moment to buy at lower prices. However, the persistent downward trajectory of these bank stocks has led investors to exhibit signs of capitulation. 

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According to Bank of America Corp. strategists citing EPFR Global data, a total of $2.1 billion was withdrawn from financial stocks in the week through May 10, marking the highest outflow since May 2022. Refinitiv Lipper also noted that exchange-traded funds focused on the sector experienced the largest cash exodus since September, and over the past two weeks, more than $2 billion has been withdrawn from the $29 billion Financial Select Sector SPDR Fund.

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This retreat jeopardizes the ongoing slump triggered by the failures of Silicon Valley Bank and other lenders in recent months. 

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The collapse of these institutions raised concerns about other banks facing similar challenges due to rising costs and mounting losses resulting from the Federal Reserve's most aggressive interest-rate hikes in ten years, which have reverberated through the economy.

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The selloff has emboldened short sellers and inflicted heavy damage on regional banks, making them one of the worst-performing sectors in the stock market this year. Since the beginning of March, Western Alliance Bancorp, Zions Bancorp, Comerica, and KeyCorp have all plummeted by at least 50%. Financials make up eight of the ten worst-performing stocks in the S&P 500 in 2023.

Ben Gerlinger, an analyst at Hovde Group, has persistently argued that the decline in Western Alliance's stock is unwarranted and irrational, emphasizing that the bank is in a stronger position than its peers. 

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However, he acknowledges that trading behavior has adopted a herd mentality, with investors abandoning bank stocks altogether. Gerlinger maintains an "outperform" rating on Western Alliance and predicts that the stock price will approximately double over the next year.

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Regulators, including Fed Chair Jerome Powell, have endeavored to instill confidence in the nation's banks, asserting that the system is "sound and resilient" following the seizure and sale of First Republic to JPMorgan Chase & Co. Yet, these reassurances have done little to assuage investors concerned about various pressures squeezing banks. These pressures include the need to raise deposit rates to counter the outflow of cash to higher-yielding money-market funds, mark-to-market losses on assets, and the risk of defaults on small business and commercial real estate loans in the event of an economic contraction and persistently high office vacancies.

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Ann Miletti, head of active equity at Allspring Global Investments, expressed skepticism about the situation, stating that a history of smoke usually indicates a fire and suggests that everything may not be fine.

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When the turmoil initially unfolded in early March, there were indications that investors were attempting to profit from buying the dips—a strategy that had proven successful during the bull market of the pandemic. For instance, the Financial Select Sector SPDR Fund attracted approximately $1.2 billion in one week in mid-March. 

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However, the subsequent attempts to capitalize on these opportunities turned out to be ill-timed, as bank stocks failed to rebound, leaving investors hesitant to try again. The SPDR S&P Regional Banking ETF, for example, experienced six daily declines of at least 5% since March, but according to Bespoke Investment Group's analysis, it subsequently posted a median decline of 2%. Similarly, the KBW Bank Index, tracking 21 lenders, has plunged more than 33% since early March.

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The relentless sell-off has significantly discounted the valuations of regional bank stocks. According to data, stocks in the KBW benchmark are currently trading at approximately 7 times their earnings, less than half of their value

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