Bank stocks fell like a stone last week, but ended higher ahead of the Fed — what comes next?

Bank stocks fell like a stone, but ended higher ahead of the Fed rate decision -- what comes next?

Two more banks, Credit Suisse and First Republic, faced a crisis in the past week. Where does that leave banks (big and small) now?

by SARA KHAIRI

Three US banks – SVB, Signature Bank, and Silvergate – have collapsed this month in less than two weeks. Over the weekend New York Community Bank agreed to buy more of Signature, followed by Credit Suisse being fast-tracked into a takeover by rival UBS on March 19 for $3.24 billion, well below its market value of $8 billion at the time of the deal.

The series of unfortunate events this month has raised concerns about the stability of the US banking system by and large. This has stirred fears of potentially broader problems in the banking system as central banks have begun raising interest rates most rapidly in over four decades to overcome inflation and end an era of easy money.

Amid mounting pressure, this brings into question: Is the regional First Republic Bank the next domino to fall?

As First Republic Bank has somewhat of a similar profile to SVB, JPMorgan Chase Chief Jamie Dimon held talks with the chief execs of other major banks last Thursday to contain the banking crisis and entrench First Republic's smashed finances whose stock price tanked nearly 47% on the same day.

JPMorgan was the first bank to make a move to make uninsured deposits at First Republic. A sale of First Republic or outside capital injection “are also on the table,” reported the WSJ.

The rescue plan of 11 of the nation’s largest banks to provide a liquidity boost to the struggling First Republic to get it through the crisis didn't sit well with investors, echoing fears of SVB collapse reverberation. Since then, First Republic customers have withdrawn $70 billion from the institution over the last few weeks.

As a result, (big and small) bank stocks fell like a stone last Friday. Regional bank stocks saw sharp declines, while shares of the 10 largest US banks by market capitalization each fell 2% or more last Friday, losing $54 billion in market value.

First Republic's shares have fallen about 90% this month to Monday, while US bank stocks closed higher on Monday as investors were analyzing steps to contain the upheaval in the sector and looking forward to the Federal Reserve’s upcoming decision on US interest rates.

Investors were keeping close tabs on the Fed’s meeting on Tuesday and Wednesday regarding interest rate hikes. 53% priced the chance of a 0.25% point rise, and 47% estimated no change. 

In a decision that met expectations, the Fed indicated a pause in further rate hikes in the wake of the recent financial sector chaos. The agency on Wednesday opted to go for a smaller hike in key interest rates by a quarter (25 bps) of a percentage point in March 2023, taking the rate to the 4.75% - 5% target range.

Shares of First Republic sank 48% despite recent efforts to fortify the regional bank. However, they were seen soaring 30% on Tuesday after Treasury Secretary Janet Yellen noted in her recent speech that financial regulators would be inclined to support smaller regional banks just the same as SVB and Signature to stamp out the risk of failures becoming contagious.

The recent market turbulence leads to the question if the community and regional banks that are a big part of the SMB and consumer lending sectors would stanch the credit outflow negatively impacting economic growth in addition to hiked interest rates — or whether a recession may be at hand?

Market recap

Fintech stocks were a mixed bag in the past week

Block - down 18% to $61.88 per share

• Block stock fell on a Hindenburg Research short-seller report alleging numerous claims against the company.
• The report is based on a two-year investigation that claims Block has “systematically taken advantage of the demographics it claims to be helping,” alleging the firm inflated its user metrics and facilitated fraud.

Upstart - down 14% to $13.58 per share

• Upstart Holdings has shed $138 million from its value in the past 7 days, and shares are down 88% for the year.

• The company is putting up lower profits. To reinstate shareholders' confidence, the company needs to make headway with revenue.

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