Regional bank rebound may be short-lived

Following a trio of big bank failures earlier this year, some struggling regionals have bounced back in recent weeks. One expert says he doesn't expect it to last.

Silicon Valley Bank. Signature Bank. First Republic Bank. The implosion of these regional banks earlier this year sparked a mini-meltdown in the financial services sector. The S&P Regional Banking ETF has lost about a third of its value so far this year as the failures of this trio has severely dented investor confidence.

But some regional bank stocks, most notably hard-hit PacWest Bancorp, have rebounded sharply from their lows in recent weeks. Is the regional banking crisis really over?

Not yet, according to Garrett DeSimone, head of quantitative research at OptionMetrics.

Photo by Mariia Shalabaieva on Unsplash

“I don’t think we’re out of the woods yet. We’ve had a shift in attention to this tech driven AI rally,” DeSimone told me, referring to the surge in Nvidia and other stocks riding the artificial intelligence wave.

DeSimone said he’d still be worried about the fact that a lot of regional bank stocks are heavily shorted. That means many investors are continuing to bet against them and the recent pops could very well turn out to be ephemeral, driven more by short squeezes than a true change in fundamentals.

And with the Federal Reserve still hinting at at least one more rate hike, perhaps in June, as it tries to fight inflation, DeSimone told me that regional banks face even more risk. Commercial loans in their portfolios could begin to sour as the Fed continues to tighten.

The next Fed meeting (and Jerome Powell press conference) is on June 14. Keep a close eye on what Powell says then about the possibility of more rate hikes. If Powell starts flapping his hawk wings again, regional banks could be in for a painful summer.