To The Moon

The smaller banks carry a bigger Commercial real estate (CRE) burden. Is the risk with only the smaller banks or is this a bigger concern across the banking & financial industry? This is a recent extract from Factset. A tale of two bank industries.Banks hold the majority of CRE mortgages by volume, with 61% of total CRE debt residing on their balance sheets (excluding multifamily). Within the industry, however, there is a dichotomy between large and small banks. As shown in Figure 15, CRE accounts for 24% of total industry loans outstanding, but CRE represents just 13% of total loans at large banks, while accounting for 44% at small banks. Figure 16 shows this at the individual bank level; the list of banks with the highest CRE/Total Loans ratios is dominated by small- and mid-sized banks. As per the above, the smaller banks have a much higher exposure to CRE compared to the large banks like JP Morgan, Citibank, Bank of America & Wells Fargo (which I refer to as the “Big 4” in this article). The above showed the weight of CRE for the various banks. Should CRE crumble, these are likely to be the ones who will be part of the collaterals. From the above table (after a survey involving 33 banks), we have the following observations: Projected losses from domestic CRE are not limited to the smaller banks with Morgan Stanley and Goldman Sachs estimated at 21.0% and 19.7% accordingly. For projected losses from Credit Cards, Goldman Sachs, Fifth Third, Capital One & TD Group have projected losses of over 20%. For projected total loan losses, Capital One and Discover ranked the highest at 13.3% and 16.3% respectively. Other concerns Fortune article in late March about $1.7T unrealized losses Fortunate has a report that highlighted an estimated $1.7 trillion of unrealized losses in late March 2023. This is reported by Yahoo Finance: Blackstone Inc on Monday said it had again limited withdrawals from its $70 billion real estate income trust in April as investor redemption requests continued to pile up. Blackstone said BREIT had received $4.5 billion worth of withdrawal requests in April, fulfilling $1.3 billion or 29% of the total redemption requests. In March, BREIT had also received requests totaling $4.5 billion, fulfilling just $666 million or 15% of those demands. With the above, Blackstone has earned its place as a potential victim of this banking storm. My investing Muse While the smaller banks have bigger exposures to CRE, the banking sectors have various risk exposures. When the system breaks, it does not break even. We do not know the detail about other banks (both small and large). We are unsure how the banks manage defaults, unrealized losses due to rising interest rates, credit crunch, deposits and all. The recent years of low-interest rates have created a “norm” that is more of an abnormality. People, businesses and industries got used to easy & cheap credit, allowing them to take risks in business and entrepreneurship. With the rise of inflation, the interest rate hikes have caught several unaware. When cheap credit is not available, one of the first to be scrutinized will be the growth stocks. These are companies with innovations but without near-term profitability. In such an environment, investors would swap them out for other stocks already generating returns to cover the rising interest payments. It is possible that the bigger banks could take over smaller banks along the way. Yet, it is also possible for the bigger banks to go under. It is a good time to review the operations, optimize the processes and reduce unnecessary overheads. The Fed gave birth to this inflation with excessive stimulus and is trying to curb this with surging interest rates. Is this a case of the murderer trying to be the hero? Regardless, it is needful for us to consider hedging ~ into different asset classes & different countries as more black swans land in the coming days. Let us spend within our means, avoid leverage and invest with what we can afford to lose. Let us save up “cash for crash” so that we can buy into great businesses at good discounts. @TigerStars $Blackstone Group LP(BX)$ $Invesco KBW Bank ETF(KBWB)$