US Regional bank stocks - PNC Financial, TFS - Truist, USB- USB Bank, MTB - M&T Bank etc

[Spekulatius]

29 minutes ago, KJP said:

 

Yes, that certainly seems to be the case.  What is your view on something like Western Alliance?  Too much of a gamble?

I looked at it briefly, but felt that it's too risky to put much into it. I definitely wished i bought some around $8. it does not look like a bank that regulators would just shut down though. ZION, FITB and KEY are similar play , but in a bit better shape and I think they should be fine. They may be good candidates for "ambulance chasing".

Edited March 15, 2023 by Spekulatius

[LearningMachine]

1 hour ago, KJP said:

the 10-year returns on many of the regional banks (MTB, USB, TFC) look quite poor.

 

Returns have not been super-great also for the big banks over the last 10-years because

• #1. interest rates have been low
• #2. Banks, especially Category I banks, have been required to build higher CET1 ratios.  So, all the money that could have been going to make loans or given back to shareholders has been getting used to more than double the equity needed in some cases.  That money could have been used to return 100% of the equity back to shareholders, but it wasn't.  It was the right thing to do make banks more robust.

 

The above two are not true going forward. 

 

Edited March 15, 2023 by LearningMachine

[Spekulatius]

13 minutes ago, LearningMachine said:

 

Returns have not been super-great also for the big banks over the last 10-years because

• #1. interest rates have been low
• #2. Banks, especially Category I banks, have been required to build higher CET1 ratios.  So, all the money that could have been going to make loans or given back to shareholders has been getting used to more than double the equity needed in some cases.  That money could have been used to return 100% of the equity back to shareholders, but it wasn't.  It was the right thing to do make banks more robust.

 

The above two are not true going forward. 

 

USB is an example of what happened. revenues went up ~40% in 10 years, share  count down 20% ,earnings from $3/share to $5/share yet shares trade lower than they did in 2012. Just one example as there are many others. Maybe Mr Market is correct, but at some point, something has to give.

 

And yes @LearningMachine is correct, that USB needs to rebuild their equity base that was reduced by the MUFG acquisition.

[CorpRaider]

I always adopted the view propounded by other, smarter people, that we would probably need to come through a bit of a crisis and flex like utes to get the valuations up (and also maybe to get the populists and regulators to lay off).  Davis doubles ain't easy.

Edited March 15, 2023 by CorpRaider

[KJP]

42 minutes ago, LearningMachine said:

 

Returns have not been super-great also for the big banks over the last 10-years because

• #1. interest rates have been low
• #2. Banks, especially Category I banks, have been required to build higher CET1 ratios.  So, all the money that could have been going to make loans or given back to shareholders has been getting used to more than double the equity needed in some cases.  That money could have been used to return 100% of the equity back to shareholders, but it wasn't.  It was the right thing to do make banks more robust.

 

The above two are not true going forward. 

 

 

On the other hand, credit has been quite benign.  You may now get a period where credit worsens and NIM gets squeezed by low-yielding legacy assets.  Or not.  I'm a banking amateur (and even that may be giving myself too much credit).

[tnp20]

Anyone looking at FITB....its got pretty good rations based off that spreadsheet...

 

Uninsured deposits: 42%

Liquidity to deposits:  33.6%

Loses on HTM: 0% (I have seen a similar low number in another report if not zero)

[Spekulatius]

52 minutes ago, tnp20 said:

Anyone looking at FITB....its got pretty good rations based off that spreadsheet...

 

Uninsured deposits: 42%

Liquidity to deposits:  33.6%

Loses on HTM: 0% (I have seen a similar low number in another report if not zero)

FITB (Fifth third) definitely has losses on securities as well - about $6B. They hold $56B of income securities at cost. They  hold very little in the HTM bucket, most is in AFS, but that really does not matter much for regulatory purposes.

Edited March 15, 2023 by Spekulatius

[tnp20]

[wabuffo]

AFS mark-to-market losses are taken to AOCI & shareholder equity as well as regulatory equity as they happen.  It is the HTM losses that are not.  It is these mark-to-market losses that created the issue for SVB & other banks.  SVB faced the issue that they would have to begin to sell their HTM securities to meet deposit flight but which would unlock the losses and immediately flow them to regulatory equity rendering the bank insolvent. 

 

Bill

Edited March 15, 2023 by wabuffo

[Spekulatius]

39 minutes ago, tnp20 said:

I think there are mistakes in this table or it's meaningless. Banks can elect if they put debt securities in the AFS or HTM bucket. If they put them in the AFS bucket, then they are taking a hit to book value (if the security loses value), in the HTM bucket, they do not.

For regulatory capital purposes, both AFS and HTM get treated the same though and they do not take a hit to regulatory capital if they put it in  either AFS or the HTM bucket (as long as it's not impaired or sold) . Regulatory capital is what should matter here.

 

For example, BAC has $173B in tangible book value. Most of their securities are in the HTM bucket, so they have not taken a hit to book value on their HTM losses which are ~$115B. So tangible book would really be $173B -$115B = $58B which looks pretty bad in above table.

Edited March 15, 2023 by Spekulatius

[wabuffo]

For regulatory capital purposes, both AFS and HTM get treated the same though and they do not take a hit to regulatory capital if they put it in  AFS or the HTM bucket. Regulatory capital is what should matter here.

 

I think AFS securities (if they have shifts in values) do affect the measurement of regulatory capital.  

 

https://libertystreeteconomics.newyorkfed.org/2018/10/what-happens-when-regulatory-capital-is-marked-to-market/

 

 

Bill

Edited March 15, 2023 by wabuffo

[CorpRaider]

My understanding accords with Bill's and if they put it in HTM but have to sell the type of security they have to mark it all.  If you have durable float you can actually HTM it's just an accounting convention and you just reinvest the principal and interest you receive daily at higher rates.  The AFS just flows through AOCI to equity as it is marked.

 

 

Edited March 15, 2023 by CorpRaider

[Spekulatius]

1 hour ago, wabuffo said:

For regulatory capital purposes, both AFS and HTM get treated the same though and they do not take a hit to regulatory capital if they put it in  AFS or the HTM bucket. Regulatory capital is what should matter here.

 

I think AFS securities (if they have shifts in values) do affect the measurement of regulatory capital.  

 

https://libertystreeteconomics.newyorkfed.org/2018/10/what-happens-when-regulatory-capital-is-marked-to-market/

 

 

Bill

I actually think that banks can elect if they do let AOCI affect regulatory levels or not, but I am not sure.

 

here is one Example. FFIEC report from Exchange bank in Santa Rosa. They hold a huge bucket of securities (~$1.5B) in AFS. MTM loss ~$150M

Hence the fair value losses run to GAAP equity and reduce it from ~$350M to ~$200. However , despite th MTM losses reducing in GAAP book value, and the securities held AFS  regulatory capital stills stands at $350M

 

Second page below shows that Exchange bank has elected to opt out of AOCI. So I think the GAAP equity is $202M here and the regulatory capital is $355M. As far as I know any bank that I have looked at ops out of AOCI adjustments affective regulatory capital. I may have misinterpreted something

 

 

 

Example ZOIN Bank - same form:

 

 

I always imagine that if the CFO or his assistant one day makes a mistake and checks the box with a "0" instead of a "1" and sent this to the FDIC the bank could instantaneously implode with the Fed standing at the door on a Friday afternoon to shut the place down. Oops.

[wabuffo]

You might be right Spek - it seems regulatory rules were loosened in 2019 for banks with under $10b in assets which includes this opt-out rule for AFS.  I'm reading up on these new rules now.  It doesn't apply to bigger banks (>$10b in assets).

 

Bill

[Spekulatius]

Just now, wabuffo said:

You might be right Spek - it seems regulatory rules were loosened in 2019 for banks with under $10b in assets which includes this opt-out rule for AFS.  I'm reading up on these new rules now.  It doesn't apply to bigger banks (>$10b in assets).

 

Bill

$ZION is bigger than $10B in terms of balance sheet size and they get treated the same than Exchange bank which is smaller than $10B. I believe the systemically important banks have different rules than the smaller ones. Size really matters in banking.

[wabuffo]

Interesting.   I appreciate your digging into the regulatory filings.  Its funny because Zions is classified as one of the domestic US SIFI banks - so I am totally confused now.

 

Bill

Edited March 15, 2023 by wabuffo

[tnp20]

Morningstar Investment Research Center.pdf

[Xerxes]

Interesting comment on Closing Bell pod on CNBC:  measuring P/B but adjusting B for unrealized bond losses 

[Valuebo]

Please...

[Spekulatius]

If you take Book, you should at least tangible book.

 

FWIW, I took a look at Signature bank. The bank was rated BBB+ / A- when it was seized. The banks want insolvent either - they had $7.2B in equity,  ~$700M in preferred and the bond losses were about $3.2B total. So there was quite a bit of equity left. There are many banks still standing that look worse. What SBNY didn’t have was a stable deposit base. They also had the crypto connection against them. So there was a bank run and instead of saving them, the bank was seized, despite reasonably solvency. I think the point can be made, that it was probably the crypto connection , that did them in. I think the regulator were probably out to get them. It’s interesting and somewhat alarming because I don’t think I have ever seen a bank with those metrics that SBNY had fail.

 

At the end of the day, while numbers matter, it’s really only two things that matter - the trust of the regulators and the trust or the banking customers. If one of these is lost, your tangible book value will not save you.

 

I think balance sheet and earnings wise, FRC is in a way worse condition, yet is still limping around. Although, I think they may become part of JP Morgan wealth management soon. It can’t really be that great to cater to HNW clients when your stock trades like a penny stock on steroids.

 

[KJP]

25 minutes ago, Spekulatius said:

 

FWIW, I took a look at Signature bank. The bank was rated BBB+ / A- when it was seized. The banks want insolvent either - they had $7.2B in equity,  ~$700M in preferred and the bond losses were about $3.2B total. So there was quite a bit of equity left. There are many banks still standing that look worse. What SBNY didn’t have was a stable deposit base. They also had the crypto connection against them. So there was a bank run and instead of saving them, the bank was seized, despite reasonably solvency. I think the point can be made, that it was probably the crypto connection , that did them in. I think the regulator were probably out to get them. It’s interesting and somewhat alarming because I don’t think I have ever seen a bank with those metrics that SBNY had fail.

 

 

I suspect you are right that Signature's business lines played a big part in its downfall, but were there also other potential issues?  If the deposit withdrawals were big enough, wouldn't Signature have had to start turning to its loan book to raise cash either directly or as collateral, rather than rely on just the securities portfolio?  Based on Item 2(b) of page 24 of that call report, there were more MTM losses lurking in that loan book.  Moreover, by accepting those loans at par as collateral, Fed/Treasury may have set a precedent that they did not want to set and weren't going to set on behalf of a bank like Signature.  It may seem implausible that a $25 billion securities portfolio would be insufficient, but I also suspect the scale and speed of a modern "digital" bank run could be unprecedented, potentially resulting in failures of banks that would have survived in the past.

 

I also suspect you are right that there are hundreds (thousands?) of banks that are insolvent if you MTM the whole asset base as I have suggested, but absent a run on them they will earn/amortize their way out of it.

Edited March 15, 2023 by KJP

[Spekulatius]

@KJP Signature bank had a liquidity issue, not a solvency issue. Their deposits were fleeting and they had $31B in MM accounts and others in short term savings. there was relatively little in transactional account. Ad for 12/31/2022 they had already drawn ~$12B from FHLB, but they have not borrowed from the discount window (I think they can do so by using MBS or treasures as collateral.) At 12/31/2022, their liquidity didn’t look that great, but not that bad either. They had ~$6B in cash and I think a total of $12B in cash and ST securities.

 

My guess is that the situation must have deteriorated from 12/31/2022 and Barney Frank said, that they were OK until the last hours of Friday. the withdrawals must have been huge , I guess in excess of $30B so they exhausted  cash, FHLB capacity and discount t window capacity. Either that or the treasury / FHLB don’t let them draw down their credit line.

 

Ny concern is that similar things can repeat. Maybe we get Meme inspired deposit runs on instructions started on Reddit. the Fed and regulators should take the potential for those serious because a few failures will cause a banking meltdown. I think extension of deposit insurance (higher limits or no limits at all) may be necessary.

 

I think you are also correct that there is less friction. Social media was around in 2008, but we have seen the herding being much more pronounced as is  evident by the GameStop /Meme crowd, Then there is easer transfer capability which formerly needed to do in the branch. Now I can do it Friday afternoon at 3Pm to get my money back the same day. Again, removing friction is great for the customer , but it also can get things moving much faster and pot. destabilize a bank.

 

I would love to see a post

 mortem of a Signature bank case much more so than the Silicon Valley bank, because the former was mich more like a plain vanilla Bank than the latter. anyways, the risk as different than what the regulators have considered so far, which were mostly due to economic distress, loan losses, counter party failure. I don’t recall seeing losses on securities due to higher interest rates and sudden bank runs accounted for in stress tests.

 

 

Edited March 16, 2023 by Spekulatius

[Viking]

Is First Republic dead man walking? Credit downgrade to junk can’t be a good thing. Followed by ‘rumour’ it is up for sale? Not something a consumer/business customer wants to hear. It will be interesting to see if any banks actually get sold and to whom. 

—————

First Republic Bank, which was downgraded to junk by S&P and Fitch, is looking at a possible sale: Bloomberg

 

https://ca.finance.yahoo.com/news/first-republic-bank-downgraded-junk-020341444.html

 

Ratings agencies S&P Global and Fitch cut First Republic's credit rating to junk status.

 

The bank is now considering various options, including a sale and boosting liquidity Bloomberg reported.

It could attract interest from larger lenders if it goes on sale.

 

First Republic Bank is considering various options, including a sale, Bloomberg reported Wednesday, citing people with knowledge of the matter.

 

The bank is expected to attract interest from larger lenders if it goes on sale, per Bloomberg. The San Francisco-based lender is also looking at options to boost liquidity, per the news outlet.

 

Ratings agencies S&P Global and Fitch had cut First Republic's credit rating to junk status earlier on Wednesday due to concerns that depositors could pull funds from the lender.

 

First Republic has been assuring customers of its liquidity since the implosion of Silicon Valley Bank — which in turn triggered concerns about the financial health of regional banks.

 

On Sunday, First Republic said it was getting $70 billion of additional funding from the Federal Reserve and JPMorgan Chase after its share price slumped sharply amid Silicon Valley Bank's implosion.

 

"We believe the risk of deposit outflows is elevated at First Republic Bank despite the actions of federal banking regulators and the bank actively increasing its borrowing availability to mitigate risk associated with the bank failures over the last week," wrote S&P Global Ratings analysts Nicholas Wetzel and Rian Pressman.

 

First Republic's share price closed 21.4% lower at $ 31.16 apiece on Wednesday. They are down 74% so far this year.

Edited March 16, 2023 by Viking

[benchmark]

13 minutes ago, Viking said:

Is First Republic dead man walking? Credit downgrade to junk can’t be a good thing. Followed by ‘rumour’ it is up for sale? Not something a consumer/business customer wants to hear. It will be interesting to see if any banks actually get sold and to whom. 

—————

First Republic Bank, which was downgraded to junk by S&P and Fitch, is looking at a possible sale: Bloomberg

 

https://ca.finance.yahoo.com/news/first-republic-bank-downgraded-junk-020341444.html

 

Ratings agencies S&P Global and Fitch cut First Republic's credit rating to junk status.

 

The bank is now considering various options, including a sale and boosting liquidity Bloomberg reported.

It could attract interest from larger lenders if it goes on sale.

 

First Republic Bank is considering various options, including a sale, Bloomberg reported Wednesday, citing people with knowledge of the matter.

 

The bank is expected to attract interest from larger lenders if it goes on sale, per Bloomberg. The San Francisco-based lender is also looking at options to boost liquidity, per the news outlet.

 

Ratings agencies S&P Global and Fitch had cut First Republic's credit rating to junk status earlier on Wednesday due to concerns that depositors could pull funds from the lender.

 

First Republic has been assuring customers of its liquidity since the implosion of Silicon Valley Bank — which in turn triggered concerns about the financial health of regional banks.

 

On Sunday, First Republic said it was getting $70 billion of additional funding from the Federal Reserve and JPMorgan Chase after its share price slumped sharply amid Silicon Valley Bank's implosion.

 

"We believe the risk of deposit outflows is elevated at First Republic Bank despite the actions of federal banking regulators and the bank actively increasing its borrowing availability to mitigate risk associated with the bank failures over the last week," wrote S&P Global Ratings analysts Nicholas Wetzel and Rian Pressman.

 

First Republic's share price closed 21.4% lower at $ 31.16 apiece on Wednesday. They are down 74% so far this year.

Given the new 'reality' that deposits are safe, if anyone buy them at the current price, they are getting it cheap.

[Gamecock-YT]

9 hours ago, Spekulatius said:

I actually think that banks can elect if they do let AOCI affect regulatory levels or not, but I am not sure.

 

here is one Example. FFIEC report from Exchange bank in Santa Rosa. They hold a huge bucket of securities (~$1.5B) in AFS. MTM loss ~$150M

Hence the fair value losses run to GAAP equity and reduce it from ~$350M to ~$200. However , despite th MTM losses reducing in GAAP book value, and the securities held AFS  regulatory capital stills stands at $350M

 

Second page below shows that Exchange bank has elected to opt out of AOCI. So I think the GAAP equity is $202M here and the regulatory capital is $355M. As far as I know any bank that I have looked at ops out of AOCI adjustments affective regulatory capital. I may have misinterpreted something

 

 

 

Example ZOIN Bank - same form:

 

 

I always imagine that if the CFO or his assistant one day makes a mistake and checks the box with a "0" instead of a "1" and sent this to the FDIC the bank could instantaneously implode with the Fed standing at the door on a Friday afternoon to shut the place down. Oops.

 

 

As someone that used to send reports like these in, I can assure you the CFO and/or his assistant don't get anywhere close to these reports. And in the past when there have been errors, it's usually not the FRB/FDIC catching the errors, it's a few quarters down the road that the bank identifies and self-reports.