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Minyan Mailbag: It's a Regional Bank Revolution

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Faith and loyalty can go a long way.

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Professor Succo,

With the 2-10 year spread down to 14 bps, how does one explain the strength in regional banks today? What are your thoughts?

- Minyan Kevin

MK,

I am afraid you will have to ask those buying the stocks; it makes little sense to me.

With the long bond up a point, perhaps these buyers believe that lower rates will spur lending. Of course that ignores the fact that all rates are higher than they were a month ago and of course as you mention, more loans don't mean more profits with a flat yield curve.

I suspect, with the markets still liquid (real rates still around zero), that as one sector gets hit (autos), the money has to go somewhere. And there still is the perception that banks are "safe".

Professor,

I asked an ex-colleague of mine who runs a financial services hedge fund (L/S), and he said:

"I think it's a lack of anywhere else to be - pharma sucks, fed is closer to being done everyday, dividends are healthy - but I agree, I have no idea why. It's crazy, but you can't fight the tape."

I agree with him that "the fed is closer to being done everyday" is a widespread belief.

If that ends up being wrong, well, there's the opportunity.

- Minyan Kevin

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Professor Succo,

I have some contacts in the industry and to my knowledge they have not been raising the interest they pay depositors at the same rate that the 2 year and Fed Funds have gone up. Many are still paying sub 1% on checking and even savings accounts. Obviously, their depositors will eventually either demand higher rates and/or move money, but that has not yet happened. The level of customer loyalty at many regional banks is fairly high due to the fallout of all the larger bank mergers - particularly on the small business lending/deposit side - as formerly "big" clients of local banks are moved to an 800 number relationship with larger banks. Some regionals may actually enjoy increased net interest margins in the near term until depositors finally balk.

Regards,
Minyan James

MJ,

The first is true, and overall higher rates add to the amount of earnings; this may add a few cents to near term earnings. But this float will close as depositors will not put up with the widening spread for too long. Much depends on the particular bank and how it manages this float: some are much better than others.

As rates rise so does mortgage risk for several regional banks and a few money centers.

No positions in stocks mentioned.

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