#57 What's Next for Banks?

Eddie Duszlak thoughts on Navigating Uncertainty in the Banking Sector

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This is a guest post by bank expert Eddie Duszlak, who runs Virtuent, a systematic, market-neutral hedge fund focused on small-cap banks. He previously wrote #52 Bank Expert Analysis: Eddie Duszlak and a Verdad Weekly Research about quantitative models for investing in banks. We hope you enjoy his insights.

Virtuent is an investment firm focused on the U.S. banking sector. Our focus on the sector is due to it being an inefficient part of the equity market. As data scientists, we like that it’s a sector with more stocks than the average sub-sector, and a more granular level of data than most sectors thanks to regulatory filings.

In this post, we wanted to share what we’re seeing in the data as it relates to the U.S. banking sector. Today, while there are signs for optimism, clarity is needed on a few key risks, and we provide our takeaways after discussing these items. The post concludes with the most popular questions we are getting right now on the sector.

Let’s start with the good news.

The Bulls.

There are a few indicators that should give market participants comfort that the situation is not universally as dire as it may have seemed initially.

Insider activity, which shows that bank executives and directors are actively buying their own stock, is currently flashing a strong bullish signal. This data is especially important right now because executives and directors have the best data of what is going on within their bank. It is noteworthy the extent to which executives and directors have been buying stock, at the fastest pace since the second quarter of 2020. While some purchases may be signaling, many of these are material buys.

The other signal relates to deposit activity. The market’s key concern has been that smaller banks are experiencing bank runs, not unlike what was experienced at SVB, Signature Bank and First Republic. Here, old-fashioned channel checks by many covering banks, and many under-followed headlines on community banks and now on regional banks, point to no unusual deposit activity for most banks during this period and that deposit outflows at regional banks have slowed considerably in recent days.

Another signal is a result of the price action this month. The SPDR S&P Regional Banking ETF is a liquid proxy for regional banks. The ETF launched in June 2006, which offers us just over 200 months of data. Through last Friday, the month-to-date return for the ETF left it at its third worst month in history. Here, it is worth noting that the forward 1-, 6- and 12-month return for the ETF has historically been above average when bank stocks have reached this level of a drawdown.

While this data indicates that the situation may not be as universally concerning as many may think, it’s also important to cover the uncertainty that’s weighing on the sector, and factors that have the potential to weigh on bank stocks in the coming months. This is covered in the next section.

The Bears.

In the short-term, there are two outstanding risks that, if resolved, would help to increase clarity for bank stocks and the overall industry…

You can see Eddie Duszlak’s full thoughts by clicking the following link - enjoy!

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