© Reuters. Watch out for short squeezes in mid-cap banks, warns Morgan Stanley
Morgan Stanley analysts warned investors to watch out for a short squeeze in mid-cap banks in a note on Tuesday.
The group has fallen 11% month-over-month and 31% since March 8, the analysts explained, but “the recent declines appear to be exaggerated because QTD deposit outflows are in line with seasonality.”
The decline was “driven by concerns that deposit outflows are accelerating into Q2 ’23, given recent headlines about deposit outflows at PACW (not covered), and the acquisition of FRC by JPM,” they wrote. “The decline indicates that investors are more concerned about the risks of forward-looking estimates.”
With sentiment overly negative, Morgan Stanley doesn’t think it will take much to drive a potential short squeeze here. In addition, analysts say there is no evidence of accelerating deposit outflows.
“While industrywide ‘small bank’ deposits fell 0.7% sequentially according to Fed H.8 data, this is actually in line with normal seasonal declines during the second quarter,” they said. In earnings, several banks such as CBSH, HBAN and WBS indicated that balances were higher against March 31. Updates from management teams since then have also indicated deposits are holding up better than feared.