Bank failures in the United States are rising this year. Already, five regional banks – First Republic, Signature, Silicon Valley Bank, and Silvergate – have all failed. At the same, the SPDR Regional Bank ETF (KRE) has plunged to the lowest level since 2020. There are worries that more banks could fail soon. Here are the two I expect to go out of business in May.
Why regional banks are falling
In this article, I explained why PacWest (NASDAQ: PACW) will likely crash to zero in the coming days. Unfortunately, it is not the only bank I expect to fail. There are three main reasons for this. First, regional banks have a high exposure to the commercial real estate sector, an industry that is on the verge of collapse. A good example of this is a recent report of a $300 million building that is now set to sell for $60 million in San Francisco.
Second, regional banks have made negative headlines recently, meaning that many depositors have moved to withdraw their cash. Banks only do well when there is a good equilibrium between deposits and withdrawals. Therefore, many troubled banks need to raise capital to shore up their balance sheets. These funds are not there, as most investors fear being wiped out.
Third, banks will need to increase their funding, which will lead to lower returns in the next few months. A combination of lower deposits, huge funding costs, high unrealized profits, and a lack of confidence will put more banks under pressure. Further, short interest in regional bank stocks has jumped.
Focus turns to Western Alliance, Comerica, PacWest
As we have seen with Credit Suisse and First Republic, it is hard to save a sinking ship in the banking industry. Therefore, I believe that Western Alliance, Comerica, and PacWest could be the next American banks to fall in the next few days.
Western Alliance Bank stock price has crashed by 30% in the past five trading days. Similarly, PacWest shares have lost 72% of their value in the same period while Comerica share price has dropped by over 18% in this period. PacWest has even started to explore strategic options. As we saw with First Republic, investors don’t have the appetite for these toxic regional banks.
These three banks have seen deposits fall in the past few months. They are also highly concentrated in California and have a huge exposure to the commercial real estate sector. Also, they all have substantial unrealized losses.
Therefore, even if these banks don’t collapse, their returns in the next few years will be significantly limited. Also, they will need to contend with lower deposits and tighter regulations.
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