Specialist
Executive at a commercial lending specialist
Agenda
- Operating environment for US community and regional banks, analysing median trends around deposit growth and credit quality
- Recent events fuelling diversified view on banks’ liquidity funding sources
- Scenario breakdown of implications from Silvergate (NYSE: SI) and Silicon Valley Bank’s (SVB; NYSE: SIVB) recent failures
- Reactive regulatory expectations from the FDIC (Federal Deposit Insurance Corp) and Federal Reserve following BTFT (Bank Term Funding Program)
- Outlook for 2023 and beyond, with thoughts on expectations for further bank runs
Questions
1.
How has the US community and mutual banking sector evolved over March 2023?
2.
How have the fundamentals inherent to analysing and monitoring the US community and regional banking space been altered in the last two weeks?
3.
We’re anticipating an important announcement from the Federal Reserve later on 22 March 2023 regarding rates. How do you think this ongoing regional bank crisis is impacting the Fed’s decision? What might be some of the implications of a rate increase or decrease on the bank sector?
4.
To focus on commercial real estate, we saw Blackstone default on USD 562.5m in real estate bond payments. If the company is not worried necessarily about its credibility as it pertains to making payments, what does that speak to how the rest of the industry is approaching this?
5.
How would you build a framework to determine similar portfolio risk across the regional bank landscape? What are the main variables or KPIs you’d use to triangulate what players might be most or least at risk of a similar outcome to the banks we’ve seen close over the last few weeks?
6.
On the unrealised losses on longer-term held-to-maturity securities, there are about 185 other banks with similar duration risk or mismatching on their durations. Looking at that group, markets are currently trying to figure out who are at risk and who aren’t. How are you approaching this? It’s quite a long list. Should they all be considered at high risk? How should we be evaluating this?
7.
If in a scenario where we’re 12 months on and still seeing banks sitting on a loss, we may see the Fed look to extend the facility, what might that do to eliminate all perception of risk from regional banks? What stops every bank manager from playing the riskier strategies with shareholder returns, if they know liquidity will be guaranteed by the government?
8.
Some people are making the argument that the level of persistent government intervention is reducing the banking sector to one more akin to utilities, reducing any element of competition. How would you assess that narrative?
9.
Regional bank stocks have been very volatile over the last two weeks. How much of the impact on markets has been fuelled by actual risk and negative performance or the perception of risk? On 22 March 2023, PacWest management released a report discussing how it had just undergone efforts to free up liquidity in the fields of about USD 17.7bn, secured from an array of sources. It’s also reported that 130 new accounts have been opened in its venture banking line. With this in mind, we’re still seeing the stock drop nearly 10%. Why is the market reacting to news such as this? What part of that news may have triggered this decline?
10.
What are the puts and takes of increasing the USD 250,000 threshold for deposit insurance? What level would banks like to see if that threshold is increased?
11.
You mentioned which banks are considered systemically important vs others. Is there an argument to be made that this determination should be made based on a bank’s concentration in a specific industry? It’s largely reported that SVB [Silicon Valley Bank] was the bank for a very significant portion of the global innovation economy, and that falling had implications for that industry as a whole. What are your thoughts on approaching systemically important banks from that perspective?
12.
How could median deposit pricing trend across community and regional banks, given elevated competition for deposits across institutions and higher-yielding vehicles such as money market funds?
13.
Can you estimate how much net interest margins will contract across the industry? As of 2019, the average net interest margin for American banks was 3.5%. If it’s at X% today, how do you see that trending negatively over 2023? What level of compression can we expect?
14.
How are you evaluating the current developments around First Republic, who dove 47% in trading on Monday 20 March 2023 after receiving a liquidity injection from larger banks? Is the current performance proving to the market that short-term liquidity injections are not effective in securing longer-term confidence? What does that say here?
15.
What’s the probability of seeing a sale of First Republic occur? What profile of institution would you expect to consider making a play here?
16.
What type of profile could look to make a move on First Republic? Is it a large bank or another regional bank? Is it a PE firm looking to acquire some of the loans? Can you describe your thought process?
17.
What target range of loan-to-deposit ratio are most regional banks trying to reposition to reach now?
18.
Besides First Republic, what are your thoughts on M&A and consolidation in the rest of the community and regional bank space? At least as of Q4 2022, the community bank consolidation rate was around about 2.8%. How do you see that moving? Do you think we can expect to see more M&A in the space?
19.
Similarly to First Republic, if players finds their reputations and scenarios are irreparable and their brand names cannot attract depositors anymore – given brand names for banks are a constituent of confidence – could more banks opt to be bought out as a potential solution to their damaged perception?
20.
We’ve talked about shorter-term regulatory responses to stem the panic. What longer-term regulatory response can we expect to take hold?
21.
What’s your outlook for further contagion? You said you don’t think we will see this, but who else are you monitoring closely that you might expect to suffer a similar fate to previously closed banks? Can you tie that in with your six-month and one-year outlooks for the community and regional banking space?
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