With unprecedented volatility in the market this week, thanks to the recent U.S. bank closures and fear of contagion spreading across Europe, the BCA Research team is doubtful banks can stay profitable in the foreseeable future. The shutdown of both Silicon Valley Bank and Signature Bank last Sunday evening were the biggest since the global financial crisis of 2008, and the news roiled markets. The S & P 500 is up about 1% after it briefly gave up all its 2023 gains in the previous session. The KBW Regional Banking Index is higher by just 0.2% Thursday. Irene Tunkel, chief strategist at BCA, said in a note Thursday that although she isn’t expecting another crisis on that scale, the downshift in banks’ performance is supported by general macroeconomic conditions. There also could be an opportunity for investors to use potential bounces to underweight the industry, she added. KBWR 1D mountain KBWR Regional Bank index “We believe that this remains the most prudent course of action, selling banking exposure into a potential bounce,” she wrote. “To capture the best exit point, we are putting banks on a downgrade watch from current neutral position.” Tunkel gave eight points to support her “pessimism”: Tighter monetary policy “Dwindling” demand for loans Tightening credit conditions Delinquencies are expected to pick up Smaller banks’ net interest margins are pressured Continuing dearth of corporate activity The recent “bailouts” likely resulting in higher deposit insurance fees Intensifying regulatory headwinds “We conclude that the banking industry is facing pressure on multiple fronts, which will result in disappointing earnings growth and prolonged underperformance of the sector,” she said.
