After depositor runs led to the collapse of Silicon Valley Bank and Signature Bank this spring, investors and onlookers wondered how similarly sized institutions would fare. Would they have to merge with bigger banks? Break up their businesses and shrink drastically? Or were more of them simply doomed?
Then, when a third lender, First Republic Bank, flirted with destruction for weeks before JPMorgan Chase bought it in May, it was hard to see how depositors would ever feel comfortable trusting midsize banks again.
Relief has now arrived. Quarterly earnings reports released this month detailing midsize banks’ performance from April through June have shown that their balance sheets look healthier than they did in the previous quarter, with higher-quality loans and more money set aside to cover surprise losses.
The KBW Nasdaq Regional Banking Index, a proxy for the industry, is rebounding after plunging 35 percent during the crisis. It is now up around 27 percent from its May 11 low.
Alexander Yokum, an analyst at the independent research firm CFRA, said worries about the future of midsize banks had “almost completely evaporated in the second quarter.”
The stock prices of midsize banks, those with $50 billion to $250 billion in assets, have actually increased more than big-bank stocks recently, he added.
Some macroeconomic luck — the much-forecast U.S. recession has so far been avoided — has contributed to the turnaround. But the banks have also made significant changes to regain stability.
Midsize banks have spent more to attract customer deposits
The biggest problem midsize banks had this spring was a sudden exodus of deposits. A panic among Silicon Valley Bank’s customers spread to customers at Signature, First Republic and other banks of a similar size.
To lure some of these old depositors back and attract new ones, regional banks have offered better interest rates.
“They were forced to look around and say, ‘I’m going to pay for my deposits, I’m going to defend my position,’” said Ryan Nash, a Goldman Sachs analyst covering regional banks.
To customers who had moved deposits into money-market funds or short-term lending facilities overseen by the Federal Reserve, bankers offered yields of 5 percent or more to bring cash back into their banks.
Phoenix-based Western Alliance attracted $3.5 billion in new deposits during the second quarter. Overall, according to Sayee Srinivasan, the American Bankers Association’s chief economist, midsize banks either saw their deposits grow during the second quarter or held them steady.
This strategy came with costs. Comerica, based in Dallas, was one of the banks threatened this spring by worries that its big, uninsured depositors would flee. During the second quarter, the lender began offering more significant returns on depositors’ money, as high as 5 percent. Its deposits grew for the quarter, but so did its interest expenses, by a whopping 88 percent. Still, the bank earned more than $2 per share in profits for the quarter.
They got rid of unprofitable loans
Overall, midsize banks’ loan books have increased modestly, according to Mr. Srinivasan of the American Bankers Association, who analyzed bank earnings and other data collected by the trade group.
Bankers’ biggest focus over the most recent quarter was improving the quality of their loan books.
Some banks have cut back on less profitable products like auto loans, which are also unlikely to foster loyalty because customers often deal with car sellers when buying and financing a vehicle.
Michael B. Maguire, the chief financial officer of Truist, a large regional bank based in Charlotte, N.C., that saw its stock price plummet 43 percent from March to May, told analysts this month that the bank had “intentionally reduced production” of auto loans.
Another approach was to avoid renewing loans to companies that did not use other bank services. Because banks often make money by charging small fees for an array of tasks for the same customer, customers are more valuable if they engage with the bank for multiple products. Some banks decided customers that had only a loan with the bank weren’t worth keeping.
Bucking the loan growth trend that Mr. Srinivasan described, the Cleveland-based lender KeyCorp said it had shed $1 billion in loans during the second quarter.
“We’re scrutinizing every portfolio we have in the bank,” the chief executive, Christopher M. Gorman, said in an earnings call with analysts last Thursday, adding that “most stand-alone loans don’t return their cost to capital.”
They look more prepared for the future
When Silicon Valley Bank revealed in March that it had sold, in a single day, a portfolio of what it had assumed were safe investments that were losing value because of rising interest rates — and had lost $1.8 billion in the process — it signed its own death warrant.
Investors began hunting for other banks that didn’t seem properly prepared for the Fed’s rate increases. As rates have risen and many office workers have proved unwilling to revert to prepandemic routines, worries grew about banks’ commercial real estate loans, specifically those to builders and owners of office space.
Midsize bank executives took special care this month to emphasize their low overall exposures to those loans. According to Mr. Yokum, the CFRA analyst, the office-loan exposure of midsize banks is between 2 and 4 percent of each bank’s total outstanding loans.
Still, Mr. Yokum said, most of the banks reported adding additional funds to the pools of cash they keep available to cover surprise losses.
Regional banks whose stock prices took heavy hits this spring, including M&T Bank, Fifth Third Bancorp, Bank OZK and East West Bancorp, all increased their loan-loss provisions.
The steps that banks have taken to shore up their profits have made investors and depositors less worried about another crisis. The extra provisions could be particularly helpful if the economy takes a turn for the worse, or if fears around midsize banks rear up again in the fall, once more financial market participants return from vacation.
Mr. Nash, the Goldman Sachs analyst, said investors also took comfort in signs that if any midsize banks did hit a rough patch, they might now be more easily absorbed by their peers.
That’s exactly what happened on Tuesday when Banc of California announced that it would merge with the midsize bank that remained in the most trouble, PacWest.
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