There are plenty of reasons to shy away from regional banks but that doesn’t mean that the sector is devoid of opportunity—just ask one-time bond king Bill Gross.
Gross has been warning against regional banks for some time, on Monday comparing the sector to a “falling knife” on X, the platform formerly known as Twitter. Although even in his bearish assessment, he admitted that there is “extraordinary long-term value” to be had in the sector as some names begin to trade at 60% book value and offer 7% yields.
While that may be Gross’ broad thesis for regional banks, higher yields may be more of an enticement than trading well-below book value.
“There is much value there. Today’s action very encouraging. Buying a little despite earlier tweet,” Gross told Barron’s via an email through a spokesperson. The
SPDR S&P Regional Banking ET
F (ticker: KRE) advanced 1.5% in Monday’s trading, outpacing the 1.2% gain in the S&P 500. But Gross isn’t looking at the index, he has been buying “a little” of
Citizens Financial Group
(ticker: CFG),
Truist FinancialCorp
oration (TFC), and
KeyCorp
(KEY), Gross said through his spokesperson.
All three offer yields north of 7% and all trade below book value but not quite to the level Gross tweeted. Citizens meets the mark on both criteria, trading at 50% of book value as of the close of the third quarter whereas Truist trades at 68% book value and KeyCorp trades at 87%. Still, for all three, a yield above 7% when Treasuries offer 5% could be a compelling opportunity.
Of the broader regional bank sector, Gross tweeted last week that he was waiting to make buys but considered regionals to be “great long term holds.”
Gross’ assessment of the sector is similar to the apprehension a lot of other market participants have felt. The Federal Reserve’s rapid push to tamp down on inflation by raising interest rates has been an immense problem for banks—leading to the collapse of three regional banks this spring. Even though few expect other banks to face the same fate that befell Silicon Valley Bank and others, banks were sitting on $558 billion in unrealized losses in their securities portfolio as of the close of the second quarter, according to the Federal Deposit Insurance Corp.
Few banks expect to have to realize those losses but the banks are basically left with “frozen assets” on their balance sheets, Barry Knapp, managing partner of Ironsides Macroeconomics, told Barron’s. This has led Knapp to conclude that small and medium-size banks are in an “unworkable situation” that is exacerbated by the inversion of the yield curve, in which rates on short term debt have exceeded rates on longer-term debt.
“Banks can’t grow, and the curve is impairing profitability,” Knapp said. With losses on their balance sheets, many banks are going to be unable to lend. This hurts regional banks that are more dependent on revenue from interest they earn on loans versus larger peers that derive a meaningful portion of their revenue from fees.
With bonds being the bane of most banks’ existence, it may make sense for a bond guy like Gross to spot opportunities.
Write to Carleton English at carleton.english@dowjones.com
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