Regional Banks Face Headwinds

This week as regional banks start reporting earnings we will get a better look at the lasting effects of the bank crisis kicked off by the failure of Silicon Valley Bank last month. Looking at recent earnings forecast revisions, regional banks appear particularly exposed to short- and longer-term headwinds.

So far this earnings season, larger banks have come out with stronger earnings than some expected. J.P. Morgan explicitly benefitted from receiving deposit inflows from stressed regional banks as well as having a more diversified business model. As of today, the broader bank sector as measured by the SPDR S&P Bank ETF (Ticker: KBE) has outperformed its regional bank counterpart, the SPDR S&P Regional Bank ETF (Ticker: KRE), by several percentage points this year.

Percent Price Decline YTD: KBE SPDR S&P Bank ETF vs. KRE SPDR S&P Regional Bank ETFs

This is no wonder considering the multiple challenges facing regional banks, including net interest income compression (due to the demand for higher yield deposit accounts), higher exposure to troubled commercial real estate, and a lack of diversification in their business model, not to mention increased competition from fintech, which now includes the likes of a Goldman Sachs-sponsored Apple Savings account yielding 4.15%.