- “Still ahead” for regional bank stocks, Morgan Stanley’s Daniel Skelli told Bloomberg on Monday.
- This is because lenders are facing profitability issues, changes in legislation and the risks associated with their exposure to commercial real estate, he said.
- Shares of US regional banks fell after the collapse of Silicon Valley Bank and Signature Bank in March.
The collapse in U.S. regional bank stocks is not over yet as the sector faces potential regulatory changes and risks from stress in the commercial real estate market, according to the head of wealth management at Morgan Stanley.
“These small and medium-sized regional banks still have some work to do due to their increased lending to the commercial real estate sector, which is struggling with high vacancy rates,” Daniel Skelli, Head of Asset Management, Morgan Stanley, Market Research and Strategy, said Bloomberg on Monday.
Regional banks bore the brunt of the turmoil that shook the financial sector last month after the collapse of Silicon Valley Bank and Signature Bank. First Republic Bank is down 87% year-to-date, while PacWest is down 50% and Western Alliance is down 32%.
This, combined with profitability concerns among regional banks, is forcing Skelly and his team to “still be relatively cautious” about banking stocks, which they’ve been neglecting for some time.
“You have problems not only with profitability for the regions, they, of course, are most affected by commercial real estate. And so when you think about these zero-cost-of-capital deals that are rolling out, we’re starting to see some notable updates there,” Skelly said.
Another factor to consider, Skelly said, is regulatory clarity and possible changes to banking rules in the coming months.
“When you think about big banks, they have been cleaning their balance sheets for more than 10 years, they are more exposed to a strong consumer… But if you look again at the regulatory environment for the regions, it is evolving. We will hear in May, in June, new rules regarding capital ratios, liquidity and requirements, etc.,” Skelli said.
“The events of the past month or so, in terms of swift action by the Fed and FDIC, have certainly been likely to be credit-sensitive and creditworthy. But if you think about equities in terms of new equity ratios, growth slowdown, potential buyback slowdown, we think there’s still some pain ahead.”