BNKU - Don't Bank On It

2023-05-05 13:20:00 ET

Summary

• I do not think our banking crisis is over. Much of this centers on the Fed raising rates too far and too fast, which is causing all kinds of havoc, especially our community and regional banks.
• All the members of the KBW Bank Index, including some of America’s largest banks, have noticeably retreated. The $2.5 billion SPDR S&P Regional Banking exchange-traded fund is on pace for its lowest price since September 2020.
• Things out there in the financial sector may be much worse than we realize, and I would be more than a little cautious in putting any equity money into banks now.

I have been writing “Out of the Box” for more than twenty years now. Most of the time, I have enjoyed thinking things through and sharing them with you. I will admit, candidly, that there have been a few times when writing my commentary was painful. However, there have been a few times when I felt that “Out of the Box” must be written, and today is one of those days. The subject is neutral, but I feel the outcome may be painful. All I can do, in the end, is share my honest thoughts with all of you.

I do not think our banking crisis is over. Much of this centers on the Fed raising rates too far and too fast, which is causing all kinds of havoc with our banks, especially our community and regional banks. The plunge in Western Alliance Bancorp ( WAL ) and PacWest Bancorp ( PACW ), that topped 60% at one point, triggered multiple equity halts and raised the fear of which banks might be next. The rout has engulfed several other lenders, with First Horizon Corp. ( FRCB ) down 34% after its merger with Toronto-Dominion Bank ( TD ) was scrapped. This, in my view, was a major departure from recognizing many banks as reliable assets.

All of the members of the KBW Bank Index, including some of America’s largest banks, have noticeably retreated. The $2.5 billion SPDR S&P Regional Banking exchange-traded fund is on pace for its lowest price since September 2020. Both of these are wake-up calls. Things out there in the financial sector may be much worse than we realize, and I would be more than a little cautious in putting any equity money into banks now. Until the Fed steps in with new and tighter regulations, which I am expecting, it is my opinion that you just don’t know what you are buying.

Despite Fed Chair Jerome Powell’s and Treasury Secretary Janet Yellen’s assurances that the banking system is sound and that authorities were closer to containing the crisis, I remain unconvinced. Smaller lenders are under pressure after a year of rate hikes hammered the value of their bond holdings and drove unrealized losses to an estimated $1.84 trillion, according to data provided by Bloomberg.

Other examples of the carnage include PacWest Bancorp, which has tumbled 45% even after saying core deposits have increased since March and confirming it’s in talks with several potential investors. Western Alliance also claimed to pare losses but was down 29% despite its denial that the firm is exploring strategic options, including a possible sale of all or part of its business.

We may or may not be in a credit crisis, but it certainly seems as if many of our smaller banks are having asset management issues, as the Fed has hiked rates by over 500 basis points in their battle with inflation while not seeming to make the proper judgement concerning the collateral damage that they are causing. The cost of money is going through the roof, as the Prime Rate at many banks now stands at 8.00-8.25%, while the interest rates on credit cards has exceeded 20% at many institutions.

You may also think of the damage that has been done, and will be caused, for many restructurings or for the banks that have bond maturities coming due this year and next year. There is bound to be a significant negative impact on some banks in both their revenues and profits. We are in a maelstrom, so to speak. Also, credit standards for lending are now under the gun, and getting money at any price is significantly more difficult now, in my observation. This is going to have a significant impact on real estate, mergers & acquisitions, buyouts and dividends. The noose is tightening.

You may agree or not about whether we are in a credit crunch, but I would definitely say that we are in a financial system crunch.

When logic and proportion have fallen sloppy dead
And the White Knight is talking backwards
And the Red Queen's off with her head
Remember what the Dormouse said
Feed your head, feed your head

- Jefferson Airplane

Original Source: Author

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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