As Bank Fraud Climbs, It’s Time To Sell These Three Risky Bank Stocks

| August 22, 2023

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As Wall Street investors continue to embrace the adoption of Artificial Intelligence (AI), the U.S. banking sector is continuously churning difficult waters – and this time it’s not only the potential of yet another banking sell-off.

While banks have steadily regained their footing following the collapse of California-based Silicon Valley Bank (NASDAQ:SIVB) back in March, a series of monetary frauds is now laying a financial burden on both banks and consumers.

As the number of U.S. regional banks adopt digital transformation, at a rapid pace, consumers and organizations are feeling increasingly concerned over the potential cybersecurity risks these new technologies pose.

Payments And Credit Card Fraud Cases On The Rise

Digital banking has steadily gained momentum, as analysts predict that by 2025, roughly 216.8 million American consumers will rely on digital banking infrastructure.

However, while the sector is ripe with opportunity, the Federal Trade Commission (FTC) reported that consumers lost nearly $8.8 billion to financial fraud last year, representing a 30% increase within a span of one year.

Other industry data showed that it’s not only consumers falling victim to financial cyber fraud. Two-thirds of American organizations were supposed targets of payment fraud in 2022. In 2018, financial fraud activities peaked, with 82% of surveyed businesses saying they were victims of some form of payments fraud.

Financial institutions have experienced a similar increase in fraudulent activities. Last year, major banks witnessed a staggering 84% increase in check-related fraud.

The data released in a report by the Financial Crimes Enforcement Network, a subsidiary branch of the U.S. Treasury Department says that fraudsters are now using social networking platforms, such as Telegram, among others to target innocent victims.

Forward-looking predictions by industry experts estimate that card fraud losses could total more than $165.1 billion over the next decade, as victims in nearly every age group and geographical location will be exposed to the rising threat of cybercrime.

Three Risky Bank Stocks To Sell

Financial headwinds, caused by the pandemic mayhem, followed by surging inflation, soaring interest rates, and now the collapse of several high-profile banks have led to some banks dwindling right on the edge.

What’s more, banks are finding the odds stacked against them, as cybercrime and threats have become a bigger concern for many financial executives in recent years.

Banks are not only faced with having to deal with a rise in cybercrime, but complex regulations governed by the Securities and Exchange Commission, and  the Financial Industry Regulatory Authority (FINRA) has left registered investment advisors having to face-off with a network of complicated regulatory enforcements, that can often lead to intrusive federal investigations.

“Registered investment advisors (RIAs) are faced with having to deal with a daunting number of rules, laws and regulations. Many of these rules, such as the infamous Rule 10b-5, vaguely forbids a ‘course of business which operates […] as a fraud or deceit upon any person’ when an advisor or financial professional deals in securities.

This can become extremely broad, and often allows the SEC jurisdiction over conduct that was unimagined by the lawmakers who created these federal securities laws,” says Gerrid Smith, Marketing Manager of Federal Lawyer, a national network of lawyers that specializes in litigation, defense trials and compliance.

Pressure is mounting, as investors begin to withdraw their support for banking shares, as the collapse of SVB, and the wave that ensued after, took mid-sized lender First Republic Bank (NYSE:FRC), along with it, triggered a mass sell-off, as investors were seen dumping bank stocks, and cushioning their portfolios.

Now, nearly five months since the incident, investors are still somewhat uneasy over the banking sector, leaning outward, and looking to diversify on the back of sinking performance.

As investors continue an effort of due diligence, here are three risky bank stocks investors can look to sell in the coming months.

UWM Holdings Corporation

Despite witnessing some optimism on the stock market in recent weeks, regional mortgage lender, UMW Holdings (NYSE:UWMC) has come under fire, as the company has seen sinking profits and overall financial performance against the backdrop of rising interest rates.

Based on financial performance, quarterly revenue fell by 23.28%, while total net income was down by over 154.45%. The Michigan-based bank reported similar performance at the end of last year, with Q4 2022 revenue contracting by half for the same period in 2021, and overall loan production income was down by 70%.

What’s more, Q4 2022 marked more than $62.5 million in losses, and in May this year, stocks tanked by more than 18% in single-day trading on the back of shaky banking sector performance.

While share performance has been somewhat promising, seeing a 98.24% rise to date, financials and the growing risk of running increasing losses are further dampening investors’ interest in UWMC.

At the same time, analysts have reduced their rating on the company, as bearish sentiment over weak financial performance continues to hamper the potential long-term outlook for UMWC shares.

Zions Bancorporation

Utah-based holding company, Zions Bancorporation (NASDAQ:ZION) has experienced similar bearish sentiment, with several analysts, including Goldman Sach (NYSE:GS) placing a ‘Hold’ position on ZION, and JPMorgan Chase (NYSE:JPM) giving the company’s stocks a downgrade more recently.

Based on recent quarterly postings, quarter-over-quarter (QOQ) net interest income decreased from $679 million to $591 million in the second quarter of the year. Elsewhere the company also reported a 9% decrease in pre-provision net revenue for the same recorded quarter.

Year-over-year (YOY) net income was down just under 14%, and between March and July, stocks toppled by 44.21%, causing investors to backtrack their support of ZION shares.

To date, stocks have already fallen by more than 21%, and while there has been some growing upside in more recent times, performance remains underwhelming for investors who are looking to side with banks and financial lenders that can ride out turbulent economic conditions.

On average, price targets of ZION shares have also been zig-zagging across the market, as Wall Street analysts have a low forecast of $27.00 per share, while the average target represents a 6.07% decrease from its most recent price range of $37.00 per share.

In more recent weeks, share prices have been steadily gaining improved momentum, however, there’s still a lot of uncertainty that looms overhead, as investors continue to remain unsure whether the company could hold out against soaring interest rates, as consumers and businesses begin to feel the pressure of higher borrowing costs.

PacWest Bancorp

The California-based lender, PacWest Bancorp (NASDAQ: PACW) has experienced turbulence in line with the recent banking crisis following the fall of SVB and the demise of First Republic Bank in March.

Similarly, in more recent weeks, research analysts and firms covering the company have given PACW shares a ‘Hold’ rating based on the knowledge that PacWest is currently exploring several strategic options to help restabilize its balance sheet.

Investors have held their bearish sentiment on PACW shares near the end of last year, and based on YOY earnings per share performance, return on EPS is down close to 80%. More than this the company reported a revenue decrease of 86%, while net income has already fallen by more than 261% YOY.

On the stock market, share prices remain volatile, as the company continues to experience an outflow of deposits, with share prices dropping 59% year-to-date, and only gaining 7,95% between July and August this year.

The regional lender has raised alarm bells for investors, as they struggle to keep depositors confident and regain investor trust following recent turbulence.

There’s still little indication of what the company’s forward-looking guidance is in terms of stabilizing its balance sheet and further rebuilding trust in the banking sector.

PACW shares continue to signal red flags for investors and raise suspicion across the stock market over whether or not the banking sector could experience further declines in the coming months if the lender is unable to attract suitable strategic options.

Looking Forward

The banking sector may have regained its footing in recent months, despite having faced immense uphill battles and an overall decrease in investor sentiment. Yet, other determining factors, including the rise in banking fraud and cyber threats have shaken the foundations of these banks even further, leaving investors to retreat, and sparking a mass sell-off as overall confidence further weakens.

While there’s still somewhat of an indication that the banking sector could rebound in the coming months, overall economic and financial volatility brought on by rising interest rates and the demise of digital security, investors will perhaps continue to approach the sector with caution as the year unfolds.

This article originally appeared at ValueWalk.

Category: Stocks

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