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Bank crisis is ‘basically over.’ Here’s why First Republic is still shaky.

Apr 18

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Big banks continued showing resilience in the face of the bank crisis during a second week of earnings reports. Bank of America followed the trend of making bank on higher interest rates, while deposit flows appeared to settle for most.

Still, results from regional banks showed more of a mixed bag. State Street, M&T Bank and Schwab all reported drops in deposits the first quarter of the year, with Schwab’s most significant at 11%. But investors didn’t run for the hills.

While the Federal Reserve’s rate hike campaign has helped buoy profits for banks, it was also the undoing for institutions like Silicon Valley Bank and Signature Bank. Meanwhile, First Republic Bank, which reports earnings on April 24, is not yet out of the woods.

“Part of the reason that the Fed is indicating they may not hike anymore and the market is pricing in rate cuts later in the year because there’s a perception that there may be a crisis in the banking sector, but from the indicators that I watch, I think that it’s basically over,” said Joseph Wang, chief investment officer of Monetary Macro. “What I watch is basically weekly data published from the Fed about loan creation in the banking sector, and as of the most recent data, it looks like banks – both large banks and small banks – have begun making loans again.”

Wang, known online as the Fed Guy, said he interprets the data to mean there’s no panic or doom, just slowing down, which is what the Fed wants.

“First Republic, though, might be a bit more challenging,” he said. “If you have 4,000 banks, some of them are not going to be managed well. We know Silicon Valley Bank obviously was not, Signature Bank was not either. And one of the banks that was not managed as well but not as poorly as Silicon Valley Bank is First Republic, so there may be some trouble there going forward.”

First Republic has lost around 90% of its market value this year and required substantial assistance from other banks to stay afloat following the failures of Silicon Valley Bank and Signature Bank. Analysts estimate the bank will report a $40 billion loss in deposits on April 24.

Bad interest rate investment plays plagued the regional bank as well, but Bloomberg reports a stockpile of low-interest loans is also dragging it down. During the pandemic, the bank dished out loans with very favorable terms, including delayed repayment, to wealthy, highly-qualified clients. That portfolio of loans is one thing hindering a sale, Bloomberg sources said.

Watch the full interview above for insight on why commercial real estate loans are troubling the market and whether a credit crunch is still on the horizon.

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Simone Del Rosario: bank earnings season is in full swing after three of the nation’s biggest institutions easily beat expectations. JP Morgan Chase Wells Fargo and Citi did it on the back of net interest income spurred by the Feds aggressive rate hike campaign, which in turn allows banks to charge more interest for loans. While we’re waiting on other major players to report this week, there’s increased focus on regional institutions after the failures of Silicon Valley Bank and Signature Bank specifically first republic which faced a liquidity crunch and march will report earnings on Monday the 24th after its stock price fell nearly 90% Since the start of the year. Joining me now to discuss this all is the Fed guy, Joseph Wang, CIO at monetary macro.com. Joseph, thanks for being here. But we’ve seen Bank of America, Goldman Sachs, Morgan Stanley reporting this week, are you expecting high interest rates to help the bottom line like we saw with the other banks last week?

Joseph Wang: Yes, that seems to be the consistent theme here. So the Fed hiked rates aggressively. And now all those banks are having loan assets to yield much more than they did before. So that’s helping that’s been a consistent theme in the big banks. And in the regional banks are reported today, Monday. So I expect that to be the same theme going forward for basically all the regional banks.

Simone Del Rosario: Are we going to be seeing any kind of cracks here? It seems like we’ve had this big banking crisis. And you know, even Jamie Dimon over at JPMorgan Chase has said that he doesn’t think it’s over. Are we expecting anything to come out of their earnings season when it comes to banks that show us that something’s still off here? Or do we think that it’s abated?

Joseph Wang: That’s the big question on everyone’s mind, especially because how the banking sector fears is going to influence monetary policy. Part of the reason that the Fed is indicating that they might not hike anymore, and the market is pricing in rate cuts later in the year is because there’s a perception that there may be a crisis in the banking sector. But from the indicators that I watch, I think that it’s basically over. What I watch is basically weekly data published from the Fed about loan creation in the banking sector. And as of the most recent data, it looks like the banks have, actually both large banks and small banks have begun making loans again. Overall, I think the message is that there’s definitely no panic, there’s no Doom, things may be slowing a little bit as the Fed would like it to be, but things are still still fine.

Simone Del Rosario: Do you think that the same is going to be said for first republic it seems like that one regional bank that is still struggling to gain footing following the collapses? The second and third largest bank collapses in the country? What do you think we’re gonna see next week?

Joseph Wang: We already had m&t Bank report their earnings, Monday today. And Schwab as well. Those are regional banks that many people were focusing on, and their results were very good. They did have some deposit outflows, which we all know. But, but they seem to be manageable, and their stocks are up notably today. Now, I expect most regional banks to be in their situation. But as you rightly note, first republic though, might be a bit more challenging. Now, let’s step back for a moment and look at the US banking sector as a whole US has over 4000 banks. If you have 4000 banks, some of them are not going to be managed. Well. We know Silicon Valley Bank, obviously was not Signature Bank was not either. And one of the banks that was not managed as well but not as poorly as Silicon Valley Bank is first republic. So there may be some trouble there going forward.

Simone Del Rosario: I’m curious, Joseph, are you surprised that we didn’t see more consolidation of banks? You mentioned 4000 banks in the United States. I think that when this all started to unfold, there was a lot of talk here in Wall Street’s that there, we were going to see a lot of consolidation that doesn’t seem to have happened yet. Are there deals on the horizon?

Joseph Wang: We’ll have a little bit of consolidation. I think one of the believe one of the smaller banks purchased a lot of assets from from the FDIC of the failed banks. But let’s again, take a step back. So pretty great financial crises, we had about 6000 banks in the US, now we have about 4000. So gradually, there is some consolidation. One of the things that I’ve heard as well is that the regulators don’t really want the bigger banks to get even bigger. So there might be some regulatory constraints that are preventing the the mega banks from gobbling up some of the smaller banks as well.

Simone Del Rosario: We’re always trying to track the trends that are going to be happening, whether it’s a credit crunch, or specifically, I wanted to talk to you before we even get to that about possible overexposure to the commercial real estate. That’s big talk right now that banks might be too overexposed to an area that seems to have quite a bit of cracks here. What can you tell me about it?

Joseph Wang: Yeah, that’s definitely a focus in the market right now. So first off, I like to know that commercial real estate is a really broad sector. So you have multifamily, you have hospitals, you have malls, and you also have office space. When you look across the commercial, real estate center office stands out as a sector that’s in a lot of trouble. Obviously, things have changed post COVID. So a lot of people are not going back into the offices. And so those people who own office buildings, they’re in a lot of trouble. And the people who lent money to the people who own office buildings, those lenders might be in trouble as well. One thing interesting in the commercial real estate sector is as many people have noted, is that a lot of the smaller and regional banks, finance commercial real estate. So there has been some concern there. But I’m not as worried for a couple of reasons. First, as we know, that commercial real estate, many sectors, office is not good. Everything else seems to be okay. But the second thing that’s not, as often mentioned, is that real estate prices have gone up tremendously over the past few years. Office space is when it takes some big haircuts. But I think most people in this space are pretty sophisticated and diversified. So they’re going to take some losses there, but it’s not going to be the whole portfolio.

Simone Del Rosario: And then lastly, let’s talk on this credit crunch. You mentioned that loan activity is starting to tick back up. So from your perspective, is this something that’s already in the rearview mirror? Or are we still watching a tightening credit standard in the United States?

Joseph Wang: As we’ve been discussing, the US has a few 1000 banks, and some of the smaller banks may may be in a more difficult situation. So they may pull back a little bit. But that I wouldn’t I wouldn’t call that a credit crunch for the banking sector as a whole since, well, overall the data shows that banks can use to make loans and the big banks who are count for the majority of assets in the banking sector are okay, so, first banks like first republic, they may be in some trouble but they’re not representative of the broader banking sector.

Simone Del Rosario: We’re talking to the Fed Guy Joseph Wang CIO at monetary macro.com Joseph thank you so much for your time today. 


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