On Tuesday, investors’ concerns over the possibility of further government rescue for the struggling industry caused shares of regional banks to fall. Comments from Federal Reserve officials triggered the fears. They warned that the banking system needed additional support and that the economic recovery was uncertain.
The S&P Regional Banks Select Industry Index fell by 4.3% on Tuesday, it’s most significant one-day drop since March, while the KBW Regional Banking Index fell by 5.2%. Every bank in the indices fell by at least 2%, indicating widespread losses.
What Did Federal Reserve Officials Say?
Comments from several Federal Reserve officials triggered the sell-off. They warned that the recovery was fragile and that more aid might be needed to shore up the financial system. Fed Vice Chairman Richard Clarida said in a speech on Tuesday that the central bank was committed to supporting the economy but warned that the path ahead was uncertain. “We are still far from our goals, and it will take some time to achieve them,” he said.
Other Fed officials echoed his concerns. Fed Governor Lael Brainard remarked on Monday that the recovery was “uneven and incomplete” and that the central bank needed to remain “patient and cautious” in its approach. Meanwhile, New York Fed President John Williams said on Tuesday that the economy was “not out of the woods yet” and that the central bank would continue to provide support as needed.
The comments come as regional banks face mounting losses from the coronavirus pandemic. According to Bloomberg News, many banks have set aside billions of dollars to cover potential loan losses. However, the actual extent of the damage remains unclear. The Federal Reserve has already taken several steps to support the sector. It includes cutting interest rates to near zero and launching a series of lending programs to provide liquidity to banks.
More Support Needed
However, investors worry that more assistance will be necessary as the pandemic persists. Some investors worry that the Fed’s limited options for stimulating the economy and the low-interest rates may necessitate drastic measures.
The sell-off in regional bank shares also comes amid broader concerns about the health of the US economy. Last week’s jobs report showed that the economy added just 266,000 jobs in April, well below expectations. The weak data has raised questions about the strength of the recovery and fueled calls for more government stimulus.
Despite the sell-off, some analysts remain bullish on the regional banking sector. In a note to clients on Tuesday, Barclays analyst Jason Goldberg said that he saw “limited downside” for regional bank shares and expected the sector to outperform the broader market over the next 12 months.
“Regional banks are well-positioned to benefit from an improving economy and higher interest rates,” Goldberg wrote. “While there are risks to the outlook, we believe that the sector’s strong fundamentals will ultimately prevail.”
However, other analysts are more cautious. In a note to clients on Tuesday, Morgan Stanley analyst Betsy Graseck warned that the sector faced “multiple headwinds,” including low-interest rates, weak loan demand, and a shift to online banking.
“The near-term outlook for regional banks is challenging, and we believe investors should remain cautious,” Graseck wrote.
The sell-off in regional bank shares is likely to continue until investors get more clarity on the economic outlook and the government’s plans to support the sector. With the pandemic still raging and the recovery fragile, it could be some time before that happens.
