Understanding the Regional Banking Crisis
Almost a year ago, the U.S. witnessed a regional banking crisis triggered by a significant increase in interest rates. This sudden surge led to a sharp devaluation of regional banking assets, particularly mortgages issued at historically low rates. The subsequent collapse of two regional banks, Signature Bank of New York and First Republic Bank, as well as Silicon Valley Bank (SVB), fueled fears of a potential bank run. Cognizant of the dire situation reminiscent of 2008, the U.S. government intervened through the Federal Deposit Insurance Corporation (FDIC) to safeguard deposits and rescue the banking sector.
Bank Term Funding Program (BTFP) Comes to an End
The controversial BTFP program played a pivotal role in stabilizing these regional banks. However, the Federal Reserve recently announced the termination of this liquidity protection program on March 11th. Does the conclusion of BTFP signify more trouble for regional banks, or has the sector weathered the worst of the storm? Here are four reasons supporting the belief that the regional banking sector is on the road to recovery:
End of BTFP: Bad News is No News
Analyzing stock price movements can be akin to spotting a subtle yet critical tells in a game of poker. Notably, the Regional Bank ETF (KRE) should have plummeted on January 24th when the Fed announced the sunset of the BTFP program. However, the fact that it didn’t is a bullish sign.
Market Projects Interest Rate Cuts Ahead
The root cause of the regional banking crisis, the unprecedented interest rate hikes, is expected to be mitigated. The market projects an 82.6% probability of the Fed cutting interest rates as early as May, thereby potentially fueling a rally in regional banks ahead of the actual rate cuts.
Bullish Price Action
Analyzing the KRE chart and the charts of top holdings such as Zions Bancorp (ZION), Truist Financial Corp (TFC), and Western Alliance Bancorp (WAB) reveals bullish signals, including the Golden Cross and the 1st Tag of 10-week Moving Average, solidifying confidence in a positive trend change.
Valuations are Attractive
The recent industry turmoil has left several regional banking stocks with historically low valuations, presenting an opportune moment for investors.
Looking Ahead
Despite the conclusion of the Bank Term Funding Program (BTFB), there are compelling reasons to believe that the worst is behind regional banking stocks. With favorable signs pointing to a brighter future, the sector holds promise for substantial growth in the coming year.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
