Four months ago, Western Alliance (WAL) was in the throes of a crisis as depositors fled after the fall of Silicon Valley Bank. This week, executives made it sound like that drama was in the past.
"I don’t think there’s any permanent damage done," CEO Kenneth Vecchione told analysts after reporting that deposits at the Phoenix-based bank had risen 7% in the second quarter and would likely rise again in the third.
Investors liked what they heard, even though profits fell. Western Alliance's stock surged nearly 8% the next day and ended the full week with a 24% gain.
Results from scores of regional banks this past week eased any lingering fears that mid-sized financial institutions faced the sort of existential threat that surfaced in the spring when the failures of three sizable banks triggered outflows across the banking system.
Deposits were up at most smaller banks, even those that suffered outflows during the first quarter, and investors responded by pushing stocks higher.
KBW Nasdaq Regional Bank Index (^KRX), which tracks the performance of the smaller banks, rose 7.3% for the week, its best weekly performance in more than a year. The KBW Nasdaq Bank Index (^BKX), which includes some of the biggest banks, was also up 6.5%.
Zions (ZION), a bank based in Salt Lake City, jumped 9% Thursday. Citizens (CFG), of Providence, Rhode Island, was up 6% on the same day. US Bancorp (USB) of Minneapolis also rose 6.5% the day it reported.
But the results also showed a number of these banks still face numerous challenges.
Most attracted more deposits during the quarter by paying a lot more for them, cutting into a key measure of profitability. Twelve regional lenders revised down their estimates of revenue or lending profits for the rest of the year, including PNC (PNC) and Truist (TFC) as well as Western Alliance and Zions.
Many of these same institutions are also bracing for higher capital requirements from the Federal Reserve that could be released as early as next week. Bankers argue that more stringent buffers will make it more challenging for them to earn robust profits in the future and possibly crimp lending.
'Spotting one robin doesn't make it spring'
The run-up in bank stocks this week, Odeon Capital analyst Dick Bove said in a note, happened because the values of banks had fallen so far relative to the rest of the market.
"There has been no significant shift in the earnings outlook of the group," he wrote. In fact, many banks "are suggesting that investors be cautious in estimating future earnings results."
One such institution is Cincinnati-based Fifth Third (FITB), the nation’s 17th-largest bank. Its deposits rose, but the bank trimmed its full-year forecast range for net interest income. That key figure measures the difference between what banks earn on their loans and what they pay for their deposits.
"We're going to always plan around a more conservative outcome because if we're wrong, everybody does well, and if we're right, we're better positioned to deliver stable earnings," said CEO Tim Spence.
The bank's CFO, James Leonard, told analysts that "our June, like everyone else's, was quite strong," but "spotting one robin doesn't make it spring. And therefore, we're going to continue to be cautious in the outlook and play defense in this environment."
The outlook for regional bank stocks in the near term "really isn’t that good" based on the fundamentals, according to Matt Maley, Miller Tabak's chief market strategist.
"Lending has gone down," Maley said. "Where are they going to make money?"
Chris McGratty, head of US bank research with Keefe, Bruyette & Woods, noted that "the stocks have done better because expectations were really really low," admitting that his team had "taken a pretty good hatchet" to future earnings estimates ahead of this past week.
He also noted the technical contribution to the week's rally. Short sellers were forced to buy $469 million worth of bank stocks over the past seven days to cover their positions, according to data from market analytics firm S3.
The boost contributed most to the stocks of US Bancorp, Zions, and Cleveland-based KeyCorp (KEY), according to the data.
"There’s been a lot of short covering," McGratty said, adding that "when things appear less bad, that can kick up the animal spirits."
Retail investors were part of the week's action, too. On Wednesday, during the rally's peak, regional bank stocks saw average daily inflows that were three times what was received in the past two weeks, according to data from market analytics firm Vanda.
"It looks like retail traders took the good news around deposits in stride and decided to chase rather than sell some of these regional names," Marco Iachini, Vanda's senior vice president of research, told Yahoo Finance.
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