Why Wall Street analysts missed the turbulence in the banking sector

Wall Street has not covered itself in glory with the turmoil in the banking sector. Analyst ratings and commentary on two of the banks that collapsed this month have not been particularly helpful to investors. That’s not necessarily all analysts’ fault, though, and understanding why might help investors in the future.

Most on the street didn’t seem to see these bank failures coming. Both

SVB Finance

(Ticker: SIVB) — the parent company of the failed Silicon Valley Bank — and collapsed Signature Bank (SBNY) had previously made big bucks and should be profitable in 2023. In fairness, regulators also didn’t predict the current turmoil.

Six months ago, 75% of the analysts covering shares in SVB Financial gave it a ‘buy’ rating. At the beginning of this month, 50% of analysts still gave SVB a buy rating. As for Signature Bank, 100% of the analysts covering the stock gave it a buy rating six months ago. In March, 56% still had bullish ratings.

Until recently, both banks enjoyed above-average popularity on Wall Street: the average buy recommendation for stocks in the


is about 58%.

However, investors also need to keep in mind that analysts’ stock ratings are relative to their overall coverage list. So, the average S&P buy-rating ratio for stocks of 58% translates to an analyst covering 10 stocks choosing six over the other four. In 2023, the average buy rating for all bank stocks was around 50%. On the one hand, this means that banking analysts were slightly more negative about their sector than the average Wall Street analyst.

Nonetheless, investors would be right to ask what happened and how such a large percentage of Wall Street analysts got these stocks wrong. It is the analyst’s job to have a thorough understanding of the industries and companies they cover.

To better appreciate how recent Wall Street ratings of the banking sector have performed, Barrons examined ratings for 73 banks from KBW bank indices, which represent the largest US banks. We used Bloomberg data to compare buy-to-rating ratios from a year ago with how bank stocks have performed over the past 12 months. Our analysis showed that there was no correlation between the performance of the stocks and their ratings. Bank stocks with a buy rating below 50% even outperformed the other more popular stocks by an average of 2 percentage points. Earlier this week, these bank stocks’ average trailing 12-month decline was about 23%.

Investors should also remember that “hold” ratings are not “buy” ratings. Wedbush analyst David Chiaverini has been on the sidelines for SVB Financial since June 2022, when he downgraded the stock from buy to hold. He pointed out at the time that almost 20% of SVB’s loans were at above-average risk in the downturn.

“Economic contraction can negatively impact early-stage credit quality, which accounts for 2% of the loan portfolio, while growth-stage loans account for 6% of loans, and its innovation [commercial and industrial] make up 11% of loans,” he wrote at the time. At that time, his target price was $450 per share; The stock had recently fallen below $400. His share price forecast has since been lowered: Chiaverini’s price target was $250 at the end of February.

Earlier this month, the combined hold ratings for SVB and Signature were 18 out of 42. Sell ​​ratings were even rarer, there were two in total — one for each stock.


Analyst Manan Gosalia downgraded SVB to sell in December, marking the only bearish call for the stock through March, according to FactSet. Autonomous Research analyst David Smith had a sell rating for Signature.

There are a few other factors behind what, on the surface, appears to be a major oversight by most Wall Street analysts.

First of all, banking is very different from other businesses – there is no equipment to manufacture equipment and devices. Banks’ assets are paper and they are funded with more paper. Deposits can be made at any time. There is so much financial leverage – in the form of deposits and debt – that trust in banking is simply far more important than in virtually any other business.

“Trust is so important to a bank and difficult to regain when it’s lost or shattered,” says Autonomous’ Smith Barrons. It is “very difficult to model this”.

Barrons Contact four other Wall Street analysts who either didn’t immediately respond or declined to comment.

Furthermore, a bank’s published financial reports still cannot tell anyone exactly what is going on at the bank. There are too many additional details about bond portfolios, credit quality, credit inventories, the match between loans and the liabilities that fund the loans, and more that are not transparent. Just as trust is critical to any bank, trust in the management that handles all banking risks is critical to an investor in any bank.

Secondly, things can happen quickly with banks. Bloomberg reported this week that $20 billion in deposits fled Signature Bank in one day last week. No one could have guessed that when looking at the bank’s last quarterly report.

After all, nobody’s really good at predicting so-called black swan events — things that happen so infrequently that they’re almost unpredictable. The panic in the banking sector this week certainly raises the question of how regulators, analysts and banks themselves could better anticipate such events — or at least take into account what happens to a stock or company when extreme events occur. That’s the idea behind the Federal Reserve’s bank stress tests, aimed at instilling confidence in the banking system. But even the tests for regional banks weren’t an alarm signal for the panic the industry is now facing.

None of these reasons are intended to completely unnerve bank analysts, but they will hopefully help investors better understand the nature of bank analyst analysis and ratings.

Across industries, analysts are good at many things, including comparing management teams and identifying industry trends. However, they are not always the best stock pickers.


SPDR S&P Regional Banking ETF

(KRE) fell 6% in Friday trade. The S&P 500 and

Dow Jones industry average

decreased by 1.1% and 1.2%.

The ETF is down about 40% from its 52-week high and about 30% from its March high.

Write to Al Root at allen.root@dowjones.com

Source : www.barrons.com

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