A customer enters the headquarters of Comerica Inc. Bank in Dallas, Texas.
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The stock selloff that hit regional banks this year has put lenders like Zions and Comerica at risk of being removed from the Standard & Poor’s 500 index.
The banks, each with a market capitalization of about $5 billion, were the fourth and sixth smallest members of the 500-company list this week, according to FactSet.
That puts the companies in a similar position to Lincoln National, which was pushed out of the S&P 500 last month and added to a small-cap index. Blackstone, the world’s largest alternative asset manager, took over from Lincoln National.
This year’s regional banking crisis has already led to changes in the makeup of the S&P 500, the investing world’s most popular broad measure of large American companies. Silicon Valley Bank and First Republic were removed from the benchmark after their deposit flows led to government seizures. Analysts say there could be more changes to come, especially if the industry faces a prolonged downturn.
“It’s absolutely a risk,” Chris Marinac, research director at Janney Montgomery Scott, said in an interview. “If the market continued to change the valuation of these companies, particularly if we have higher interest rates, I wouldn’t rule that out.”
Banks begin reporting third-quarter results on Friday, led by JPMorgan Chase. Investors are curious to see how rising interest rates have affected bond holdings and deposits during this period.
Companies that are no longer considered large-cap stocks face increased risk of dropping out of the S&P 500. At the end of August, there were seven members valued at $6 billion or less. Two of them were removed the following month: insurer Lincoln National and consumer company Newell Brands.
Those who join the benchmark often celebrate the milestone. The popularity of mutual funds and ETFs based on the index means that new members typically see an immediate increase in their share price. Those that are downgraded may suffer declines as fewer asset managers are required to own shares in the companies.
S&P guidelines
To be considered for inclusion in the S&P 500, companies must have a market capitalization of at least $14.5 billion and meet profitability and trading standards.
Members who violate “one or more of the eligibility criteria for the S&P Composite 1500 may be removed from the applicable component index at the discretion of the index committee,” according to S&P Global’s methodology.
However, that doesn’t mean that Zions or Comerica are close to delisting. The body that decides the composition of the S&P 500 strives to minimize churn and accurately represent reference sectors. Changes will only be made if “current conditions warrant an index change,” according to S&P Global.
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Shares of regional banks ZIons and Comerica have plummeted this year.
For example, after the Covid-19 pandemic hit in March 2020, many retail companies in the S&P 500 temporarily violated the profitability rule, but that did not lead to widespread downgrades, according to a person who has studied the S&P 500 index.
S&P Dow Jones declined to comment for this article, as did Comerica. Zion’s did not immediately respond seeking comment.
According to an Aug. 31 note from Piper Sandler, KeyCorp and Citizens Financial join Zions and Comerica as the only other S&P 500 banks with market capitalizations below the threshold for inclusion in the index. However, KeyCorp and Citizens each have a market cap of more than $10 billion, making them less likely to be affected than smaller banks.
After Blackstone became the first major alternative asset manager to be added to the S&P 500 last month, analysts said rivals such as KKR and Apollo Global could be next and would likely replace other financial stocks. KKR and Apollo each have a market cap of more than $50 billion.
“There may be more downgrades in small-cap financials,” Wells Fargo analyst Finian O’Shea said in a Sept. 5 research note.
–CNBC’s Gabriel Cortes contributed to this article.