Widespread Bank Shares Decline Amid Market Anxiety
On a jittery Wednesday, major and mid-sized U.S. bank shares took a significant hit, clearly underperforming the broader market. The S&P 500 Banks Index sunk by 2.0%, while the benchmark S&P 500 experienced a less severe fall of 0.5%. This downturn was majorly attributed to heightened worries around commercial real estate loans, a concern among bank investors.
Bank Executives Express Concerns over Office Real Estate Loans
Recent comments from high-profile executives sparked bank investors' worries about potential losses in office real estate loans. These included remarks from Wells Fargo's CEO Charlie Scharf and Blackstone President Jonathan Gray during a Sanford C Bernstein investor conference. Scharf warned about forthcoming losses in the office loan sector and confirmed proactive portfolio management at Wells Fargo. He reassured investors about their exposure, emphasizing that the company's investment was not heavily concentrated in the sector.
Weakness in Office Real Estate Sector – A Deeper Look
Blackstone's Gray spoke about an "unprecedented weakness" in the segment of older office buildings, which constitute less than 2% of the company's equity portfolio in real estate. He noted a 20% vacancy rate, declining rents, and decreasing valuations, attributable to companies reconsidering their space needs in light of remote work and the upcoming economic climate. This has resulted in lenders and buyers needing more support to engage with office buildings.
Banks Stocks Suffer Amid Loan Concerns
Rick Meckler from Cherry Lane Investments voiced his concern over the impact of loans made to the office market on bank stocks. Referencing Wells Fargo's comments, he highlighted the pervasive concern despite Wells Fargo's diversified portfolio. Major banking players like Citigroup, JPMorgan Chase & Co, Morgan Stanley, and Goldman Sachs experienced over a 1% decrease in their shares. Bank of America and Wells Fargo saw a more significant drop, plunging by more than 3%.
Smaller Lenders Bear the Brunt of Market Distress
Interestingly, regional lenders bear the brunt of the market distress more than their larger counterparts. Banks such as Citizens Financial, Western Alliance Bancorp, PacWest Bancorp, Comerica, KeyCorp, PNC Financial Services, Fifth Third Bancorp, and Zions were notably impacted. KeyCorp recorded the most significant decline in the S&P bank index, falling by 5.5%, closely followed by Zions, which dropped by 4.9%.
Banks Record Decline in Total Deposits Amid Other Economic Developments
In further unsettling news, the Federal Deposit Insurance Corporation announced a record 2.5% decline in total deposits at U.S. banks for the first quarter of 2023. In addition to these woes, an imminent vote on a deal to raise the nation's debt ceiling and strong labor market data, which could prompt further Federal Reserve interest rate hikes, also weighed down the broader market.