Regional Bank Stocks Volatility Attracts Retail Investors Amid Crisis

Regional bank stocks experienced mixed results on Monday, following an initial rally in the morning. This comes after the sector faced challenges last week due to the failure of First Republic Bank. Shares opened higher, with PacWest Bancorp leading the early charge, following an 82% surge on Friday. Zions was among the top performers in the S&P 500 before the market opened.

PacWest Bancorp (PACW) saw its shares rise 3.7% on Monday after a 19% surge in early trading. The bank announced late Friday that it would cut its dividend to 1 cent per share from 25 cents per share in the previous quarter in order to preserve capital. CEO Paul Taylor described the move as a "prudent step" given the economic uncertainty, banking sector volatility, and potential changes to capital requirements. He reassured investors that the bank's business remains "fundamentally sound." Following an 82% increase on Friday, PACW's stock finished Monday down around 74% year-to-date.

Other regional bank stocks experienced more modest moves on Monday. Western Alliance (WAL) edged 0.75% higher after a 50% spike on Friday, while Comerica (CMA) cut its premarket advance and dropped around 0.8% in trade. Zions Bancorp (ZION) shares followed PacWest higher, rising 2.1% on Monday after a 19.2% climb on Friday. KeyCorp (KEY) shares reversed premarket gains and dropped 1.5% by the closing bell, while U.S. Bancorp (USB) also reversed lower Monday morning after a 6% increase on Friday.

The SPDR S&P Regional Banking ETF (KRE), which includes regional bank stocks like Regions Financial (RF), Truist Financial (TFC), WAL, and PACW, shed 2% during trading on Monday after climbing premarket.

SEC Chair Gary Gensler warned bank stock investors on Thursday, pledging to investigate and prosecute "any form of misconduct that might threaten investors" after the American Bankers Association called for probes into short sellers profiting off the bank panic. Meanwhile, Treasury Secretary Janet Yellen warned that failure to suspend or lift the debt ceiling before the June 1 deadline would lead to an "economic and financial catastrophe that will be of our own making."

PacWest Bancorp's shares rose more than 3% on Monday, adding to a near 82% pop on Friday. The company announced a dividend cut late Friday evening, and CEO Paul Taylor reassured investors that the bank's businesses remain "fundamentally sound." Taylor stated that reducing the dividend was a prudent step given the current economic uncertainty, recent banking sector volatility, and potential changes in regulatory capital requirements.

Other regional banks also retreated from their highs on Monday. Zions Bancorp gained 2.1%, while Western Alliance advanced less than 1% after opening sharply higher. The SPDR S&P Regional Banking ETF (KRE) fell by 2% after bouncing 6% on Friday.

Strategas technical strategist Chris Verrone commented on the situation, stating that they are "inclined to treat this like a bear market rally in banks."

Concerns about regional banks persist after regulators took possession of First Republic last week, marking the third failure of an American bank since the start of March. A rapid increase in interest rates has weighed on banks with long-term bond assets, causing a deposit flight. Institutions with a high proportion of uninsured deposits found themselves particularly vulnerable as customers feared losing savings in a bank run.

PacWest announced last Wednesday that it was exploring "all options," confirming that it was in talks with several possible partners and investors. The California-based bank stated that it had.

d not experienced "out-of-the-ordinary deposit flows" after First Republic's collapse. Shares of PacWest are still down more than 40% in May and about 74% for the year. The SPDR Regional Banking ETF is now off by nearly 12% in May and 36% for the year.

Despite reassurances from JPMorgan Chase CEO Jamie Dimon and Federal Reserve Chair Jerome Powell that the first stage of the regional banking crisis was over, worries persist. The struggles for regional banks have led some Wall Street professionals and former regulators to call for changes to support the sector. Proposed ideas include expanding the scope for deposit insurance or instituting a ban on short-selling bank stocks, though regulators have not shown signs that either proposal is close to being implemented.

The volatility in regional bank stocks has proven irresistible for risk-loving retail investors on both sides of the trade. Last week's meltdown in small lenders, including PacWest Bancorp and Western Alliance, sharply reversed on Friday with huge gains for the stocks. The KBW Regional Banking Index opened with a gain of 1.8% on Monday, then closed down 2.8%.

Regional banks may not have the same buzz as pandemic meme-stock favorites like GameStop Corp. or AMC Entertainment Holdings Inc., but for retail traders who were burned by the bear market in 2022, the volatility in banks offers an opportunity to seek the type of quick profit those stocks used to deliver.

Retail participation in the broader market is still low compared to last summer, but there are signs it's increasing, in part due to the slide in the banking sector, according to Vanda Research. Mentions of financial stocks on StockTwits, a popular social media site for traders, doubled from the last week of April to the first week of May.

"Volatility is what traders thrive on, so they're playing both sides of these wild market swings," said Tom Bruni, a senior writer at StockTwits.

Since March, three regional banks have failed, and unrealized losses on bond investments and an outflow of customer deposits are threatening to topple others. This turmoil burned investors who bought the dip too early – if someone had bought the KBW Regional Banking Index when billionaire investor Bill Ackman said regional bank stocks were an "incredible bargain" on March 13, they would have lost 15%.

However, some investors are optimistic that the worst has now passed as the Federal Deposit Insurance Corp. provides ongoing support and the Federal Reserve signals an end to rate hikes. David Coley, a 40-year-old full-time trader in Raleigh, North Carolina, bought KRE call options on Thursday, believing that the worst of the banks had already failed. He sold some of the position for an 80% profit on Friday and unloaded more on Monday when the trade was up 113%.

"My thesis is that the government has already proven they're not going to let all these regional banks fail," he said. "I think the worst is behind us as far as the banking crisis goes."

Net inflows into KRE, which tracks the KBW Regional Banking Index, are down 35% this year, despite a 6.3% rally on Friday. The fund's net inflows topped $360 million in the first week of May after attracting more than $1.5 billion in March and April combined, according to data compiled by Bloomberg. A significant portion of this is likely retail investors, according to James Seyffart, an ETF analyst for Bloomberg Intelligence.

Some traders are wagering that there's more pain ahead. After getting badly burned on a trade involving First Republic Bank, Bryce Campbell in New York City changed his strategy to bet against regional banks. The 30-year-old professional chef, who hopes to recoup $73,000