The regional banking sector in the US is under pressure as several banks face the risk of being delisted from the S&P 500 index or acquired by larger rivals amid a stock sell-off and a credit crisis. The collapse of a handful of regional banks like Signature Bank, First Republic Bank and Silicon Valley Bank earlier this year triggered a wave of deposit runs and liquidity problems that have eroded the confidence of investors and customers in the industry.
Zions and Comerica at risk of being booted from S&P 500
Zions Bancorporation and Comerica, two regional banks with market capitalizations of around $5 billion each, are among the smallest members of the S&P 500 index, which measures the performance of the largest US companies. According to FactSet, they were the fourth- and sixth-smallest members of the index as of this week. This makes them vulnerable to being removed from the benchmark and replaced by bigger and more profitable firms.
The S&P 500 index is widely followed by investors and fund managers, and being part of it can boost the stock price and liquidity of a company. Conversely, being demoted from the index can have negative consequences, as fewer investors would need to own the shares of the company. This happened to Lincoln National, an insurer that was shunted from the S&P 500 last month and placed into a small-cap index. Blackstone, the world’s largest alternative asset manager, took its spot.
Zions and Comerica have seen their stock prices plummet this year, as they have been hit by rising interest rates, lower loan demand, higher credit losses and increased regulatory scrutiny. Zions’ stock price is down 73 percent since January 1, while Comerica’s is down 48 percent. Both banks have denied any plans to sell themselves or merge with other banks, but analysts say they could be attractive targets for larger competitors looking to expand their geographic footprint and customer base.
PacWest and Western Alliance explore strategic options
PacWest Bancorp and Western Alliance Bancorporation, two other regional banks based in the Western states, are also facing challenges as their stock prices have fallen sharply this year. PacWest, which has $40 billion in assets under management, saw its stock price drop from nearly $30 a share in early February to $3 per share last week. The bank confirmed a Washington Post report that it is exploring strategic options that include a potential sale.
Western Alliance, which has $67 billion in assets under management, watched its stock plunge to $18 per share last week. The bank now carries an equity value roughly 51 percent less than its price at the start of the year. Bank officials have categorically denied a Financial Times report from last week that it is exploring a sale.
Both banks have large uninsured deposit bases, which means that their customers have more than $250,000 in their accounts and are not covered by the Federal Deposit Insurance Corporation (FDIC). This makes them susceptible to deposit runs, as customers may withdraw their money if they lose confidence in the bank’s stability. This happened to Silicon Valley Bank, which collapsed in March after a sudden surge of withdrawals.
First Horizon and Zions face credit crisis
First Horizon Bank and Zions Bancorporation, two regional banks with even greater assets under management, are also experiencing yearly stock-price declines of 55 percent and 48 percent, respectively. These banks are facing a credit crisis, as they have large exposures to sectors that have been severely affected by the pandemic, such as hospitality, retail, energy and commercial real estate.
According to a report by Moody’s Investors Service, these banks have higher non-performing loan ratios than their peers, and are likely to see further deterioration in their asset quality and profitability in the coming quarters. The report also warned that these banks have limited capital buffers to absorb potential losses, and may need to raise additional equity or sell assets to strengthen their balance sheets.
The credit crisis in the regional banking sector has also raised concerns about the systemic risk that these banks pose to the broader financial system. According to a study by the Federal Reserve Bank of New York, regional banks are more interconnected than ever, as they have increased their lending and borrowing activities with each other over the past decade. This means that the failure of one regional bank could have a domino effect on others, creating a contagion that could threaten the stability of the entire banking system.
