Anytime an industry is cumulatively down 35% as the Regional Banking industry is right now, investors and the media start asking questions about when the right time is to step in and buy. Like anyone, we like a good value, and we appreciate the market’s ability to mean revert. However, as we investigate the current crisis, we see more volatility ahead and take note of some of the geographic concentration of the first few issues.
Silicon Valley, First Republic, and now Pacific Western have been wrapped in this current crisis. PacWest may still make it, but it’s hard to ignore that the assets called into question on banks’ balance sheets ahead of bank runs, had a concentration in California. Changes in taxes, occupancy and insurance costs materially hurt the value of assets in California over the last year and they will likely get worse before they get better.
Last week, the Federal Reserve raised rates another 25 bp to 5.25% and it is largely believed that this will be the last of this cycle’s increases in the Fed Funds Rate. We’re still a bit skeptical of this, but a pause at least gives the banks some room to breathe. Maybe banks are a buy here, but as we look at the current landscape, banks are tightening their loan practices.
Tightening lending standard will likely hurt the pricing of the assets that make up bank loan collateral. But like any broad-based call on stocks, timeframe and some measure of liquidity will ultimately decide whether buying today is a mistake or a wonderful call of the bottom. The banking industry is critical as a partner for investors and business alike. We’re rooting for their success and growth, but the ride may not be a smooth one as this year progresses.