The crash in US regional bank stocks isn't over as the lenders face regulatory changes and commercial-property risks, Morgan Stanley strategist says

• "There's still some pain to come" for regional bank shares, Morgan Stanley's Daniel Skelly told Bloomberg on Monday.
• That's because the lenders face profitability issues, regulatory changes and risks tied to their commercial-property exposure, he said.

The crash in US regional bank stocks isn't over yet as the sector faces potential regulatory changes and risks stemming from the stress in the commercial-property market, according to Morgan Stanley's head of wealth management.

"There's still some pain to come" for these small and mid-sized regional banks because of their increased lending exposure to the commercial real-estate sector, which is grappling with high vacancy rates, Daniel Skelly, Morgan Stanley's head of wealth management, market research and strategy, told Bloomberg on Monday.

Regional banks bore the brunt of the turmoil that rocked the financial sector last month following the collapses of Silicon Valley Bank and Signature Bank. First Republic Bank has fallen 87% year to date, while PacWest lost 50% and Western Alliance is down 32%.

This, combined with profitability issues among regional banks, is driving Skelly and his team to be "still relatively cautious" on bank stocks, which they have been underweight on for some time.

"Not only do you have profitability issues for the regionals, they're the ones who are most exposed to commercial real estate of course as well. And so when you think about those carry trades of the air of zero cost of capital coming unwound, we are starting to see notable updates there," Skelly said.

Regulatory clarity and potential banking-rule changes in the coming months are another factor to consider, according to Skelly.

"When you think about the big banks, they have been cleaning up balance sheets for over 10 years, they're more exposed to a strong consumer … But when you look at, again, the regulatory environment for the regionals, it's evolving. We're going to hear in May, in June, new rules related to capital ratios, liquidity and requirements, etc," Skelly said.

"The events in the last month or so, in terms of the quick actions from the Fed and the FDIC, have certainly, probably been credit sensitive and credit friendly. But when you think about the equities in terms of new capital ratios, a growth slowdown, potential slowing of buybacks, there's still some pain to come, we think."