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Believe it or not, 2023 wasn’t the year in which the record for bank failures in aggregate terms was set. That dubious “honor” belongs to 2010, but 2023 made its mark in other ways. Namely the size of the banks that did fail.
First Republic, Silicon Valley Bank and Signature Bank of New York were the second-, third- and fourth-largest bank failures, respectively, in U.S. history. So in a case of size matters, it’s understandable that some investors are once bitten, twice shy about regional bank stocks. Following the events of 2023, that apprehension is a logical response, but it may also be deterring market participants from opportunities with regional banks.
Fidelity portfolio manager Matt Reed notes that for all the talk about gloomy consumers and economic jitters, the current state of affairs with regional bank stocks is better than meets the eye.
“For some time now, banks have been busy fortifying their defenses and preparing for potential credit risks,” observes Reed, who manages Fidelity Advisor® Financials Fund (FFSIX). “But here’s the twist: Despite lingering investor skepticism, the economy, consumer balance sheets and credit quality have proven remarkably resilient, creating what I believe are undervalued investment opportunities in bank stock.”
FFSIX: High Quality, Highly Relevant Today
While not as glamorous as technology and communication services, the financial services sector doesn’t lack for tailwinds, including recent news that banks are expanding shareholder rewards efforts after passing the Fed’s stress tests. That’s relevant in discussing the Fidelity Advisor Financials Fund because it has a quality bend that levers investors to the theme steadily increasing shareholder perks in this sector.
The Fidelity fund “maintained an overweight in quality exposure and yield exposure compared with category peers. A high quality exposure means holding stocks that are consistently profitable, growing, and have solid balance sheets. And a high yield exposure is rooted in holding high dividend-paying or buyback stocks,” according to Morningstar, which rates the fund four stars with a silver medal grade.
Speaking of quality, Reed points out that regional banks’ balance sheets are sturdier than they’re being given credit for. Many of these banks are holding assets and loans that reprice to the upside over the long-term, “potentially unlocking incremental value for years to come.” Additionally, the current interest rate and regulatory setups could augur well for this Fidelity fund heading into 2026.
“The regulatory environment and interest-rate dynamics are pivotal forces shaping the banking industry,” says Reed. “The recent rate cut, coupled with lighter regulatory oversight, could enable these institutions to deploy more capital toward growth, lending and/or shareholder remuneration.”
‘Not All Banks Are Created Equal’
As Reed himself observes, “not all banks are created equal.” The global financial crisis and 2023 serve as stark reminders of that wisdom. Yet many passive strategies addressing bank stocks don’t play favorites in a sector where favoritism is warranted and could well be rewarded.
With the Fidelity Advisor Financials Fund, advisors and investors can sleep a bit easier because they can lean on Reed and his team to identify the cream of the crop in a sector that is littered with both contenders and pretenders.
Said differently, active management could be impactful at a time when many market participants aren’t aware of the growth and quality opportunities available with regional bank stocks.