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Bank stocks and regional bank stocks in particular have rallied over the last month, and there is further room to run, according to Joe Fenech, chief investment officer at GenOpp Capital Management.
In the latest Street Talk podcast, recorded July 16, Fenech said sentiment toward bank stocks is improving and that the long bear market in bank stocks ended in May 2023. The investor said the recapitalization of New York Community Bancorp Inc. in March 2024 could serve as the turning point of this investment cycle now that "smart money" has rescued one of the sector's biggest problems.
"That event reminds me very much of the recap of Bank United back in '09," Fenech said in the episode. "The stocks bottomed first in March of '09. And then a few months later, you have John Kanas and Carlyle recapping Bank United, and then that paves the way for the recap of the sector, and sentiment slowly got better from there."
Fenech added that the sector as a whole does not need to be recapitalized this time around, and the nation's largest banks are in far better shape than they were in the aftermath of the financial crisis.
Bank stocks have faced great scrutiny, though, since a trio of regional banks failed in the spring of 2023. The bank index has risen more than 40% since May 2023, while the regional bank index has climbed 30% over the same period. The underperformance of regional banks was even greater earlier in 2024, but the gap has narrowed in the last month, with regional banks rising nearly 20% and the broader bank index gaining close to 10%.
Fenech sees reasons for legs in the recent rally, noting that net interest margin pressure is easing and margins will eventually become a tailwind for banks. He noted that bank balance sheets today reflect decisions that were made when rates were near zero. There is a painful adjustment process that needs to occur, with lower-yielding assets maturing, but he believes that the headwind is going to ease for the vast majority of banks in the next few quarters.
"Then it's going to turn into what I think will be a multiyear margin tailwind for the industry," Fenech said.
For instance, Fenech pointed to SouthState Corp., which he noted had $8 billion of fixed rate assets set to reprice 2% to 3% higher. In that scenario, if those assets repriced 2% higher, the bank would record a $160 million benefit on its roughly $40 billion balance sheet, he said, resulting in a 40-basis-point net interest margin improvement.
Fenech also downplayed investors' concerns toward banks' commercial real estate exposures. Those concerns have been most focused on regional and smaller institutions, which have greater exposure to CRE, but the makeup of their portfolios is different than the largest banks. The investor argued that not all commercial real estate (CRE) loans should be seen as high risk and resulting in sizable losses. He believes there are pockets of issues in the multi-family sector, but the issues surrounding commercial real estate loans are primarily related to office properties. He further noted that large banks are really the only ones with the balance sheet capacity to make those loans.
If credit losses are not as bad as some investors fear, interest in the bank space would almost certainly increase. Fenech also believes that another catalyst could occur as he expects M&A activity to pick up, driven by succession issues and the need for scale and technology investment. The investor pointed to a few sizable deals surfacing in the last few months, including UMB Financial Corp. plans to purchase Heartland Financial USA Inc. and South State's announcement to acquire Independent Bank Group Inc.
However, while Fenech does see plenty of potential sellers looking to partner with another institution, he noted that the regulatory environment is limiting the pool of potential buyers. Those two conflicting dynamics could make this M&A cycle different from the ones in the past, he said.
"I think there's no doubt there's a pent-up demand for M&A and maybe as soon as later this year, it kicks off. But I just think it might look different than what we're used to seeing in the past," Fenech said.
