We’re getting conflicting signals from the banking sector. Is the worst behind financial institutions, or is further pain ahead? Let’s examine each piece of the banking puzzle, starting with troubled First Republic Bank (NYSE: FRC).

San Francisco-based First Republic has been foundering in recent days and seems headed toward government receivership, renewing fears of wider instability in the banking industry.

When Silicon Valley Bank (SVB) shocked the technology and banking worlds by going belly up in March, worries ran rampant that we’d witness financial contagion. Regional banks were especially scrutinized and fell victim to deposit runs, as we saw with First Republic.

First Republic’s shares have plunged, after the bank announced this week that deposits declined by 40% in the first quarter to $104.5 billion. Shares have declined about 90% year to date.

SVB collapsed on March 10. In the week ended March 15, deposits at small U.S. banks (those outside the top 25 in terms of domestic assets) shrunk by a record-breaking $192 billion.

However, large banks such as JPMorgan Chase (NYSE: JPM) actually benefited from the panic over small banks, scooping up $67 billion in deposits.

The Federal Reserve and Federal Deposit Insurance Corporation (FDIC) moved decisively to back-stop bankrupt SVB as well as Signature Bank, making customers whole and injecting liquidity into the banking system.

Since the initial shock of SVB’s demise, small banks have stopped hemorrhaging money, as the following chart shows:

I believe recent turmoil in the banking sector has spawned opportunity. The likely aftermath of the banking crisis will be consolidation in the sector, as larger banks gobble up the weakened smaller fry and absorb their deposits and customers. The shares of inherently strong but unfairly battered bank stocks currently trade at attractive valuations.

The first quarter earnings of many banks have surprised on the upside. JPMorgan, the nation’s biggest bank, posted a strong Q1 on April 14, as did most of its peers.

JPM reported a Q1 profit of $12.6 billion that was up 52% from the same quarter a year ago. JPM’s revenue of $38.3 billion was up 25% from the year-ago period.

JPM boasts a fortress balance sheet of capital reserves and it’s setting the stage for a wave of mergers and acquisitions in banking. Takeovers typically result in windfalls for existing shareholders.

To be sure, the economic slowdown is a headwind for banks, and credit conditions have tightened due to the failures of SVB, Signature, and Silvergate. The latter bank was sunk by its over-exposure to cryptocurrency accounts, which tanked in the wake of the FTX fiasco.

This uncertainty has made consumers skittish. The Conference Board reported Tuesday that its consumer confidence index declined to 101.3 in April, down from 104 in March.

However, despite rising interest rates and a stubbornly hawkish Fed, the robust jobs market should provide enough fuel to prevent the economy from lapsing into a severe recession.

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The main U.S. stock market indices closed mostly lower Wednesday as follows, with tech investors cheered by strong earnings results from mega-cap tech companies:

• DJIA: -0.68%
• S&P 500: -0.38%
• NASDAQ: +0.47%
• Russell 2000: -0.89%

This week, General Motors (NYSE: GM) and General Electric (NYSE: GE), two bellwether American industrial stalwarts, beat Q1 expectations on their top and bottom lines. Big Tech stalwarts Microsoft (NSDQ: MSFT), Alphabet (NSDQ: GOOGL), and Texas Instruments (NSDQ: TXN) also beat quarterly profit and revenue expectations.

Big Tech’s guidance this week generally has been positive, with major planned spending on artificial intelligence. Alphabet reported a massive $70 million stock buyback. These developments bode well for future economic growth.

It’s also a good sign that the CBOE Volatility Index (VIX) hovers at about 18.80, below the important threshold of 20. A VIX reading below 20 generally indicates a lower-risk environment.

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John Persinos is the editorial director of Investing Daily.

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