The SPDR S&P Regional Banking ETF (KRE) stock has been a toxic wasteland in the past few days. It has crashed by more than 22% in the past five days and is now sitting at the lowest level since November 2, 2020.
Is it safe to buy regional bank stocks?
The KRE ETF is one of the top funds that track companies in the regional banking industry. This explains why the ETF has crashed hard in the past few days following the collapse of Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital (NYSE: SI)
There is a lingering fear that more KRE constituents will collapse as well. Another risk, which I insinuated on Monday, was that many depositors will now shift their funds from small regional banks to systematically important companies like JP Morgan, Citigroup, and Wells Fargo.
However, there are reasons to believe that this fear is unwarranted. For one, a closer look at the banks that collapsed shows that they were all highly concentrated in high-risk sectors. SVB was highly concentrated in the technology sector while Signature and Silvergate were heavy in the crypto industry.
Watch here: https://www.youtube.com/embed/x8PfxbN1_TE?feature=oembed
Another unique characteristic is that SVB and Signature targeted wealthy individuals, with most of their deposits not insured. The same is true for other regional banks that have tumbled like First Republic Bank. The Fed’s response now means that all customers in regional banks will be made whole in case of a collapse. Some analysts believe that this is wrong since it will incentivize banks to take risky measures.
Recklessness in SVB failure
Most importantly, SVB failed because of recklessness and poor management, which is not common in many regional banks. In fact, many regional banks have taken a measured and prudent mechanism of holding available-for-sale (AFS) and held-to-maturity (HTM) assets. In the case of SVB, it had $91 billion in the HTM segment and $19 billion in the HTM segment.
Many regional banks in the KRE ETF cater to a broad base of customers, most of whom have insured deposits. As we wrote here, SVB’s customers had deposits in excess of $250k. Analysts believe that the FDIC will implement changes to increase the amount of money it insures in the coming months.
Therefore, I suspect that the risk of more bank failures in the next few months will be a bit minimal. Most importantly, the actions of the Federal Reserve could help the financial industry.
The bond market points to a situation where the Federal Reserve will either reduce the size of its interest rate hikes or where it takes a strategic pause. Treasuries of all maturities have all seen their yields retreat recently. Therefore, this price action will likely help banks with their AFS holdings.
KRE ETF stock price forecast
KRE chart by TradingView
The daily chart shows that the KRE ETF was in trouble even before the collapse of its constituent companies. It was forming a head and shoulders pattern whose neckline was at $55.94. In price action analysis, this pattern is usually a bearish sign.
The fund made a down-gap on Monday as it retreated to a low of $43. It has formed a doji pattern, which is usually a bullish sign. Therefore, I suspect that the fund’s stock will resume a bullish trend as investors buy the dip. If this happens, the fund will likely rise to a high of $55.94.
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