This is how I see the US “bigger” banks in the coming months and into 2024.
It is based off an accumulation of:
March 2023 US banking debacle that has brought down 3 US banks - (a) Signature Bank, (b) Silicon Valley Bank (SVB) and finally, (c) First Republic.
News articles that I have come across in recent months.
Extract of Mr Powell’s testimony with Senate Banking Committee on Thu, 22 Jun.
This is how I see it.
Summary.
US banking sector is facing a challenging outlook in the second half of 2023 and into 2024, as it:
Grapples with the aftermath of the March banking debacle.
Adheres to the FDIC's latest levy.
Explores the Fed's new credit requirement and
Enforces credit tightening within the industry.
Below is analysis of each factor and its implications to the US bigger banks.
(1) The March Banking Debacle.
On 10 Mar 2023, Silicon Valley Bank (SVB), a major lender to the tech industry, collapsed due to a bank run triggered by its exposure to risky securities and rising interest rates.
On 12 Mar 2023 (2 days later), another regional bank Signature Bank with a New York presence also failed for similar reasons.
The FDIC intervened to take control of both banks and sold some of their assets to other institutions, while also bailing out uninsured depositors to prevent systemic contagion.
The banks collapsed caused a panic in the financial markets, raised doubts about the solvency and liquidity of other banks, especially those with high levels of uninsured deposits and securities holdings.
(2) FDIC's Latest Levy.
In a bid to replenish the deposit insurance fund after the $15.8 Billion bailout of SVB and Signature Bank, the FDIC proposed a special assessment on big banks with high levels of uninsured deposits .
The assessment would impact the largest 113 US banking organizations.
The “bigger” US banks will bear the brunt of this new levy that is currently under review & feedback by all banks.
FDIC Latest Levy Harms US Banks. Ok To Invest Still?
For more details, click on above post to read about it. Thanks.
(3) The Fed's New Credit Requirement.
On Thu, 22 Jun in Mr Powell’s 2 hours session with Senate Banking Committee, he has briefly touched on the implementation of a new credit requirement.
This is applicable to the larger US banks and would not affect lenders with fewer than $100 Billion in assets.
“The capital requirements will be very skewed to the eight largest banks,” said Mr Powell.
“To a lesser extent, the regionals and then the banks between $100 to $250 billion.” added Mr Powell.
This credit requirement would ensure that banks have enough capital to absorb potential losses and continue lending during stress periods.
The conflicting unmentioned of having more “reserves” for a rainy day is having less “reserves” for business opportunities.
(4) Credit Tightening By US Banks.
With the heightened uncertainty and risk aversion that is still at play, following the bank failures, many US banks tightened their lending standards and reduced their credit availability for households and businesses.
According to the Fed's Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April 2023, a significant net fraction of banks reported tightening standards for most categories of loans to businesses and households over the past three months.
The survey also found demand for loans from both businesses and households weakened over the same period.
Credit tightening by US banks could hamper (a) the economic recovery, (b) weigh on the profitability and (c) growth prospects of US bigger banks.
In summary, US bigger banks are facing multiple headwinds that would likely erode their earnings, capital and market share in the coming quarters.
They will have to navigate through a complex and uncertain environment, while also adapting to the changing regulatory landscape and customer preferences.
All these while US inflation remains elevated in near term.
Who knows, recession might be on the card if interest hike handling is not well managed?
From here, it might look like all doom & gloom. Is it really? Is this “100%” the opportunity that we have been longing for all this while?
Below are US financial institutions (assets $100 Billions or more) that would be “implicated” by the new credit requirement:
JPMorgan Chase - $3,666 billion
Bank of America - $3,051 billion
Citigroup - $2,417 billion
Wells Fargo - $1,881 billion
Goldman Sachs - $1,442 billion
Morgan Stanley - $1,062 billion
U.S Bancorp - $553 billion
PNC Financial Services - $474 billion
Truist Financial Corporation - $504 billion
Do you think the prospects of US banks will be bright in the near future?
Do you think US banks will first recover OR the US economy?
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