Street Talk Nathan Stovall | S&P Global Market Intelligence

Tales from Top Performers is a new series under the Street Talk banner that will feature conversations with executives at high-performing banks about their bank and experience in the sector; their view of current issues, and the greatest challenges and opportunities they see ahead. The inaugural episode features a discussion between James Beckwith, CEO of Rancho Cordova, Calif-based Five Star Bancorp, a previous winner of S&P's Global Market Intelligence's annual bank rankings, and S&P co-hosts Nathan Stovall, director of financial institutions research, and Jimmy Pittenger, who oversees the firm's US financial institutions commercial team. In the episode, Beckwith discusses how he got into banking, what he loves about the industry, how his institution has built an attractive deposit franchise and managed elevated exposure to commercial real estate, and his view on the greatest challenges and opportunities ahead. 

The banks that failed in the spring of 2023 were outliers that violated some of the golden rules of banking, but many investors continue to unfairly paint the bank group with a broad brush, according to KBW CEO Tom Michaud.
In the episode, Michaud discussed the drivers of the large bank failures in 2023 and the idiosyncrasies of those institutions. He further discussed the regulatory response to the liquidity crunch and criticized the Basel III endgame proposal while advocating for deposit insurance reform. The executive also noted that investors continue to treat all banks the same and express concern over their commercial real estate exposures but noted that most of the industry faces an earnings issue rather than a threat to safety and soundness.

Regulatory scrutiny has intensified in the aftermath of the liquidity crunch that erupted in 2023 and could play an even larger role in bank M&A activity in 2024 by motivating more banks to consider selling, while also standing in the way of some transactions. The episode features views presented by advisers at Hovde Group, KBW and Luse Gorman at the Acquire or Be Acquired conference, commentary from executives at Community Bank System and Columbia Banking System on the current state of bank M&A, and some discussion of the unfolding situation at the New York Community Bancorp.

U.S. banks’ fourth-quarter 2023 earnings demonstrated continued pressure on funding costs and minimal slippage in credit quality. The Street largely took the results in stride, but management teams were hopeful that net interest margin pressure could subside in the second half of 2024 and credit quality would hold up in the face of a higher for longer rate environment, according to Gerard Cassidy, co-head of global financials research at RBC Capital Markets. In the episode, the veteran analyst said he shares that optimistic outlook and believes the current environment is more similar to 1995 when the U.S. economy digested sharp rate hikes by the Federal Reserve and likely will not result in a severe downturn like some investors fear. Cassidy believes bank stocks are a show me story but does see further catalysts on the horizon. The analyst also offered his outlook for bank M&A activity.

The word unprecedented became commonplace in banking circles in 2023. The Federal Reserve’s rate hike campaign pushed bank balance sheets deeply underwater, spurred deposit outflows and exposed asset/liability mismatches at some institutions that culminated in record-breaking bank runs that led to the second, third and fourth largest bank failures in US history. Those closures and the liquidity crunch, regulatory response, market selloff and eventual recovery that followed changed the competitive landscape and the way bank observers view the industry. This episode features commentary from experts at BTIG, Davis Polk, Janney Montgomery Scott, KBW, Luse Gorman, Piper Sandler and others on the lessons learned from the liquidity crunch, the fallout afterward and the potential opportunities that lie ahead. 

Bank stocks have rallied since the Federal Reserve offered hopes of rate cuts in 2024 and there are further catalysts on the horizon, including a pickup in M&A activity, according to Mendon Capital Advisors President Anton Schutz. In the episode, the veteran bank stock investor offered his view of bank stock valuations, credit quality, bond portfolio restructurings and increased M&A activity on the horizon, through both mergers of equals and traditional buyouts.