The recent stock selloff in regional banks has raised concerns about the potential delisting of Zions and Comerica from the S&P 500 index. As the fourth- and sixth-smallest companies on the listing, with market capitalizations around $5 billion, they are at risk of being replaced by larger players like Blackstone, who recently joined the index after the demotion of Lincoln National.
The regional banking crisis this year already led to the removal of Silicon Valley Bank and First Republic from the S&P 500, highlighting the potential for further changes if the industry continues to struggle. Chris Marinac, research director at Janney Montgomery Scott, emphasized the risk of delisting for these banks, especially if market valuations and interest rates fluctuate.
Investors are eagerly awaiting the third-quarter results from banks, beginning with JPMorgan Chase, to assess the impact of rising interest rates on their bond holdings and deposits. Companies that no longer qualify as large caps are at a higher risk of demotion from the S&P 500, as demonstrated by the removal of insurer Lincoln National and consumer firm Newell Brands. The inclusion in or demotion from the index can significantly impact stock prices due to the popularity of mutual funds and ETFs tied to the S&P 500.
In order to be considered for inclusion in the S&P 500, companies must meet certain criteria, including a market capitalization of at least $14.5 billion, profitability standards, and trading requirements. However, the decision to add or remove companies from the index is made by the committee responsible for minimizing churn and accurately representing reference sectors.
Zions and Comerica are not currently facing imminent delisting, as the committee only makes changes when necessary based on ongoing conditions. In the past, some retail companies temporarily violated the profitability rule during the onset of the Covid-19 pandemic, but widespread demotions did not occur.
In addition to Zions and Comerica, KeyCorp and Citizens Financial are the only other S&P 500 banks with market caps below the inclusion threshold. However, with market caps exceeding $10 billion, they are less likely to be impacted compared to smaller banks.
Analysts speculate that other alternative asset managers like KKR and Apollo Global may be the next to join the S&P 500, potentially replacing financial names. KKR and Apollo have market capitalizations exceeding $50 billion, indicating a higher likelihood of inclusion.
The potential for further demotions of low-market cap financial companies remains uncertain, but observers continue to monitor the market closely for any developments.
[CNBC’s Gabriel Cortes contributed to this article.]
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