Maybe it is just because I am so old, but it seems incredible to me that the collapse of Silicon Valley Bank was only nine months ago, and that the angst around regional banking in general was therefore still a thing only six or seven months old. Financial media, where the subject was covered extensively and somewhat breathlessly, has moved on completely. An industry that everyone was so worried about just a few months ago is now not mentioned at all by analysts outside of the specific field, and certainly isn’t seen as a cause for concern by traders or investors. Based on the slew of regional bank earnings that came out this morning, though, maybe it should be.
It seems to be regional bank reporting day today, with fifteen such entities releasing their calendar Q4 results. Some earnings will be released after the market closes, but among those that came out this morning, there is a clear trend emerging: it was not a good quarter for the regionals.
Not all of them missed expectations. In fact, if you look at the top six by market cap -- Truist Financial (TFC), M&T Bank (MTB), Northern Trust (NTRS), KeyCorp (KEY), First Horizon (FHN), and Commerce Bankshares (CBSH) -- there is an even split, with the first three missing and the second three beating analysts’ average estimates for EPS. What united them all, though, was a big drop in profits as compared to a year ago. The drops among those six ranged from 38% (TFC and MTB) to 15% (CBSH), with a combined average decline of 31.5%.
Clearly, while the talking heads have moved on and completely forgotten about the pressures on smaller banks that caused the meltdown at Silicon Valley and a few other regional and specialist banks, they are still having an impact. That matters.
It is yet more evidence of what I referred to a couple of days ago as a “worrying economic divide” in the U.S. I am not talking here about the gap between the haves and have nots, the wealthy and the poor. One could argue that such a gap is excessive and constitutes a threat to stability, but some kind of disparity is an inevitable consequence of capitalism and thus is ever present. Until someone finds a better economic system, it is something we have to live with.
No, I am talking about the divide right now between the financial world and, for want of a better word, the real world. The financial world, as represented by the stock market and big Wall Street banks, is doing just fine. The market is up, rates may fall soon in expectation of a soft landing, and bonuses are even larger than ever. There are, however, signs of trouble in the real world, the world where regional banks typically operate.
Commercial real estate is struggling, the mortgage boom has tailed off completely, and as I said in the above-referenced article, smaller businesses are feeling the pinch of inflation and the rate hikes that followed. Those are all areas where regional banks do business, and while signs of serious economic problems such as loan defaults are not at crisis levels, they are trending in the wrong direction, putting pressure on the regional banks’ profits.
It has been said so many times that “the stock market is not the economy” that it has become a cliché. But, like many clichés, it is repeated so often largely because it is true. The problem is that the market and the economy that underlies it cannot logically stay disconnected for long. One of them has to adjust: Either the economy has to show enough strength to justify market pricing, or prices have to fall to reflect the real economy. The regional bank results that we saw this morning suggest that the first of those isn’t happening, which makes the second -- a notable correction in stocks -- seem almost inevitable before too long.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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