Regional Bank Stocks Poised to Fall Again

Regional Bank Stocks Poised to Fall Again

A number of bank ETFs would be affected.

Reviewed by: Staff
Edited by: Mark Nacinovich

It’s beginning to look a lot like March again. 

Sorry, but for bank stock bulls, Christmas probably seems a long way from here, even as we’re now within two months of it. Like every past crisis in recent memory, bank stock ETFs are threatening to do a “Freddy Krueger” just before Halloween. They scare you; it appears the danger is past. And then, they come back…again. 

Bank exchange-traded funds tell the story, one that financial advisors and investors should pay very careful attention to. Because while the details of 2007-2008’s Bear Stearns-Lehman Brothers one-two punch are different from today’s conditions, there is an air of familiarity to Wall Street veterans. 

Back in March, a small number of regional banks fell on hard times because of market concerns that owning long-term bonds in a bank’s portfolio doesn’t help the bank’s financial condition when those bonds crater in price. 

Rate Hikes and Bank Stocks 

Ultimately, the history books will talk about the aftermath of a decade of zero interest rates, followed by a record-quick series of Federal Reserve rate hikes. Much of that story might just be what is happening to bank stocks now. And why it is happening. 

For much of this year, bank failures this past March appeared to many as, to quote Monty Python, “merely a flesh wound.” Big, well-capitalized banks and the Fed came to the rescue, tons of liquidity were pumped into the system, and the host of issues banks now face (weak consumer, weak values of their own long-term bond portfolios, stiff competition from money-market rates, etc.) seemed to fade quickly. 

Bank ETFs 

The SPDR S&P Regional Banking ETF (KRE) has seen its price travel from above $50 a share down to nearly $30 and then rebound by 40% to around $42. All of that from the start of February through late July. 

KRE and regional banks were the focus back in March. But the price action this month may be expanding beyond the obvious troubled banks. 

Invesco KBW Bank ETF (KBWB), which is dominated by a small number of giant banks, also slid in March, though investors had come to consider them relative “safe havens” within the sector. But since the summer, prices speak louder than those earlier assumptions. 

KRE dropped 20% from its Aug. 7 high, but KBWB fell 18%. Tack on a 19% loss over that same period from the First Trust Nasdaq ABA Community Bank ETF (QABA), and that trio of bank funds of different sizes and missions has collectively ruined some Halloweens. It remains to be seen if Thanksgiving and Christmas are on the table. 

We’ve been here before with bank stocks, but this time might be different. The broader stock market may not be as supportive this time around. The technical picture for most equity sectors has deteriorated considerably this month, and geopolitics just adds to the headwinds banks face. 

For those proverbially walking around the neighborhood, hoping for treats and not tricks, a pair of ETFs aim to deliver gains when bank stocks fall. The ProShares Short Financials (SEF) is a little $30 million ETF that surprisingly has not caught on this year. It shorts banks, as well as other consumer-finance companies, insurance stocks and other financials. It has gained 12% in the past three months 

 There is also a levered version of SEF, the even smaller ProShares UltraShort Financials (SKF), which has only $21 million in assets.  

Tighter Lending Standards 

Banks are tightening lending standards again, and at a rate not seen except for two other periods in modern history. When were they? To no one’s surprise, the periods around the start of the pandemic and the global financial crisis. 

It seems that every day, we get another statistic that has occurred only during those periods, perhaps during the dot-com bubble and now. This is no more a coincidence than the fact that Mr. F. Krueger keeps showing up at precisely the wrong time. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.