When we look back, we can see perfect information, how a beaten up stock or sector which has lost investor confidence regain its composure and the shares increased. We see with perfect information, if someone had invested in the stock or the group, they would have made relatively easy money. However, at the time the risk was very high, how do you buy low and sell high?

In an article by Emily Flitter of the New York Times News Service, a beaten sector was the regional banks. We all expect and want the bank you bank with to be stable and secure, and many were scared when Silicon Valley Bank went bankrupt. Many people moved their deposits as well as their share holdings to other banks. There was a practical reason, Silicon Valley Bank traded at $755 in November, 2021, it was trading around $500 when it needed capital. The 16th largest bank in the US had a mismatch of deposits to loans and was losing money. The bank catered to the software companies and the large funds pulled their money very quickly from the bank. If you owned shares in a regional bank, are you safe particularly when you see the share price fall by 50% plus. Would you buy more? What has changed?

The KBW Nasdaq Regional Banking Index, a proxy for regional banks after falling 35% is up 27% or those that kept their holdings are almost even. Those that took a risk and bought the index are up 20%. Alexander Yokum, an analyst with CFRA says the worries about the future of regional banks has evaporated in the second quarter.

What has changed? and how do you know it has changed?

The macroeconomic luck of the regional banks is the US did not go into a recession. Sometimes you need to be lucky.

The more practical reason the banks are stabilized is the growth of deposits. However, to lure the depositors back and attract new ones, regional banks offer higher interest rates on deposits. Some of the money came from money market deposits switching to the banks. Attracting deposits by paying higher interest rates means interest expenses grow, but many regionals are profitable. Watching the interest rates at the regional banks helps.

Another step was to get rid of unprofitable loans. This was the biggest focus of the banks to improve the quality of bank loans. Most regionals have cut back on less profitable products such as auto loans. (There are You Tube videos about how auto loans work and the people in the industry say there are fewer choices). The reason auto loans can be cut back is customers often deal with car sellers who arrange the buying and selling of cars which means the customers have less or no customer loyalty to the bank. Companies have to stay to fundamentals of their business.

Another approach was to avoid renewing loans to companies that did not use other bank services. Although no bank should go the way of Wells Fargo and 13 products per customer, even if you do not need them. If a customer has one product per bank, if the bank lost the business, they would not miss it too much. Many banks want 2 or 3 products to keep customers.

Another aspect of the improvement is if you hear because office workers are not going back to offices, then real estate developers has a problem with their cash flow, you might be worried. The regional banks have emphasized their exposure to office real estate is 2 to 4% of total outstanding loans. Most of the loans to office buildings in the big cities come from the large banks and alternative investments. Communication of the worst negatives is important and why not here.

JPMorgan Chase Jamie Dimon talks about fortress banking which means higher capital ratios than the regulators required is a normal way to do business. Regional banks have increased their capital ratios to cover surprise losses, while explaining they have gone through every portfolio we have in the bank. The banks report these ratios and analysts show them in their reports.

Linking to dividend paying stocks, many people own bank shares because they are profitable and pay dividends. When there is a crisis, it takes times and many aspects to go right to get through the crisis. If you watch from the sidelines and you need to understand what needs to go right and see if the signs are pointing to what the company is on the right track. Knowing the signs is part of your homework and then you have the ability to buy low and sell high with limited risk.

There are more questions than answers, till the next time – to raising questions.