Just a few weeks ago, we were asking the question, why haven't there been more blowups? The answer, it turns out, is: they're coming.
We've had two bank blow-ups in a week now. Silvergate literally shut its own doors after its largely crypto depositor base shriveled up and pulled out. Now, Silicon Valley Bank, or SVB, is on the precipice after its largely tech start-up depositor base has shriveled up and, now, is pulling out.
The common thread here is that these two were exposed to the worst-performing asset classes since the Nasdaq peaked eighteen months ago and the Fed has been jacking up interest rates. Their depositors lost a ton of money, wiping out the banks' equity base. Silvergate sold a bunch of its bond holdings to raise money, but couldn't raise enough because bond prices have dropped so sharply. I spoke with an insider yesterday who marveled, "I've never seen a bank close its own doors like this before." That's how bad it was.
And while Silvergate was too narrowly concentrated in crypto, SVB was too narrowly focused on start-ups. SVB's deposits peaked about a year ago and have fallen at least 13%--and probably more--as of last month, as The Wall Street Journal has reported. The trouble came to a head this week when the company on Wednesday reported a $2 billion loss after selling basically all of their "available-for-sale" securities--largely things like Treasurys and mortgage-backed securities that again, are down sharply in value.
As David Faber noted on CNBC this morning, SVB probably could have handled the situation better to avoid having spooked the markets so much--perhaps by raising the additional $2.25 billion it was then seeking ahead of time. But it was too late.
The shares collapsed by half yesterday, as investors and then its remaining depositors started to panic, creating a self-fulfilling situation where by the end of the day venture capitalists were advising clients to pull their money out just to be safe. The shares closed at $106, dropped further into the $80s after-hours, sank below $40 pre-market and are halted for news as of this writing. The 52-week high for these shares, by the way, was $597! Just incredible.
The obvious question is who could be next. Markets marked down shares of other regional banks that they perhaps deem to have large portfolios of potential losses or overly concentrated business models. PacWest fell 25%, First Republic was down 17%, even Charles Schwab dropped 13%. The regional bank ETF dropped 8%. Not good. I just checked the open this morning: First Republic ($FRC) is down 45% and halted. PacWest ($PACW) is down 32% and also halted.
The hits are coming from multiple different directions now. Crypto...then tech...oh, and let's not forget, it was commercial real estate raising concerns earlier this week. Fed Chair Powell was even asked about it at his appearance on Capitol Hill, and said the Fed is monitoring the issue and believes the exposures are concentrated at smaller and midsize banks.
We spoke to KBW's Jade Rahmani about who exactly is most exposed to commercial and especially office real estate where the losses are mounting, and it's a handful of small banks (like Bank of Marin, Community Financial, and Bank of the Ozarks with 12-22% of loan exposure), some larger banks with office exposure in the range of 4-5% of their loan books, some life insurers, and obviously the commercial REITs (he downgraded ACRE, for instance, with 37% office exposure).
So this is just the beginning, in other words. As more asset prices drop amid the Fed's tightening, of course banks will be facing more headaches, especially those who are least diversified away from problematic areas. And let's not forget, as Americans draw down their excess savings, and the labor market weakens, that means system-wide deposits could start shrinking. Not to mention people have yanked money out of their checking accounts to invest in, of all things, U.S. Treasurys.
To keep deposits, banks will have to pay better yields on them. But they face a quandary in doing so. As Valley Bank's Ira Robbins told us on Power Lunch two weeks ago, they're having a harder time lending out at a high enough spread to keep growing their net interest income. If they're paying 4-5% to depositors, in other words, they have to lend at, say, 9-10% to make money on that spread. But as we've reported, 9-10% rates on business loans threaten to cause a big slowdown for many businesses.
And sure enough--in yet the other big problem that was already unnerving bank stocks this week--KeyCorp came out at an industry conference and took down its forecast for net interest income this year. That's right; this was the whole bull case for owning banks amid Fed rate hikes. They're supposed to be making more money as a result. But KeyCorp took down its fiscal year guidance from the prior 6-9% growth to just 1-4% growth!
It's exactly what Peter Boockvar was saying on our show the other day--that it's ludicrous for people to say rate hikes have had no effect. You just have to wait! They are "metastasizing," to use his term. To call for the Fed to hike another half-point right now--no matter what the jobs or inflation data are saying--seems absolutely insane. I stand by my call for the Fed to pause, or even cut rates. The yield curve inversions reached new extremes this week just as Silvergate and SVB were on the brink.
Does it matter if we're adding 300,000 jobs a month right now, if we are going to end up shedding twice that many when we fast-forward the clock? The markets and leading indicators are warning that a business cycle turn is coming. "The Fed moves until something breaks," wrote Andrew Brenner of Natalliance this morning to clients. "SOMETHING IS BREAKING...And until the Fed knows how deep the contagion goes, they will slow down."
See you at 1 p.m...
Kelly
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