Moody's warning on US banks a wake-up call for sanguine investors
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[August 10, 2023] By
Saqib Iqbal Ahmed and Nupur Anand
NEW YORK (Reuters) - The slide in U.S. bank stocks this week appeared to
catch traders in the options market by surprise, data shows, raising
questions over whether bank investors have become a little too
comfortable with the sector that only months ago was in crisis.
U.S. bank shares dropped on Tuesday after ratings agency Moody's
downgraded credit ratings of several U.S. regional lenders and placed
some banking giants on review for potential downgrade.
It warned lenders will find it harder to make money as interest rates
remain high, funding costs climb and a potential recession looms. It
also cited some lenders' exposure to commercial real estate as a risk.
The warning caught some investors off guard.
A day before, options traders' expectations for near-term swings in the
shares of two major sector exchange-traded funds (ETFs) - SPDR S&P Bank
ETF and SPDR S&P Regional Banking ETF - hit the lowest level since the
collapse of Silicon Valley Bank in March, signaling little investor
concern about the sector's outlook, data from Cboe's options analytics
service Trade Alert showed.
On Tuesday, SPDR S&P Regional Banking ETF's options-based 30-day implied
volatility rose to 31.1%, up from 28.9% touched on Monday. At 30.7% late
on Wednesday, that gauge of how much traders expect the shares to gyrate
still remains well below the high of 82% touched in March.
Investors appear to have made their peace with risks in the sector and
were not focused on defensive positioning, either because they had
already shed banks exposure, or were not very concerned about fresh bad
news, said Steve Sosnick, chief strategist at Interactive Brokers.
"There's not nearly as much risk being priced in," he said.
With some 1.5 put options open against each call option, as of
Wednesday, positioning is less defensive than it has been about 80% of
the time over the last four years, and a far cry from March when there
were more than 4 puts open against each call, according to Trade Alert.
Calls convey the right to buy shares at a fixed price in the future and
are usually used to bet on shares rising. Put options give the right to
sell shares and express a bearish or defensive view.
While the S&P 500 Banks index is down about 3% for the year, compared
with a 17% gain for the S&P 500 Index, it is up about 17% from the
multi-year lows touched in early May.
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Signage is seen outside the Moody's
Corporation headquarters in Manhattan, New York, U.S., November 12,
2021/File Photo
"This is more of a shot across the bow for those investors that are
getting complacent within this space," said David Wagner, Portfolio
Manager at Aptus Capital Advisors, referring to the Moody's ratings
changes.
RISKS LINGER
The collapse of three mid-sized U.S. banks earlier this year and
record deposit outflows from smaller lenders sparked investor
concerns about the broader banking industry, but no further bank
failures and resilient economic data have helped shore up investor
sentiment since May.
Still, risks linger, including exposure to the commercial real
estate office sector, which has been hurt by lingering pandemic
vacancies and high interest rates, and the growing cost to retain
flight of deposits.
"Commercial real estate is one of the focal points for investors. It
is going to take a long time to play out and is...one of the biggest
risk factors for banks at the moment," said David Smith, an analyst
at Autonomous Research.
"There has been a change in deposit mix leading to higher cost of
funding which remains a concern," he added.
Analysts also believe that some risks from impending new regulatory
capital hikes may be under-priced, since these could result in
short-term capital pressure for some lenders.
Some investors, though, said the biggest risks are mostly short
term.
Brian Mulberry, client portfolio manager at Zacks Investment
Management, which holds stocks in a number of major lenders, said he
was looking 12 to 18 months out when earnings are expected to jump.
"In the near term, there are reasons for caution about banks in
general and we have made changes where appropriate," he said.
"As interest rates go higher, the more pressure it puts on banks'
profitability, even so, we do not see this as a solvency issue where
the entire banking system will collapse."
(Editing by Michelle Price and Diane Craft)
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