US and European Banks: Post-SVB Market Turmoil and Securities Swings

Excerpt from Footnotes and Flashbacks: Week Ending April 2, 2023

Bank anxiety eases modestly but depositor flight risk is now higher on the checklist….

The level of anxiety eased with the market able to observe the tangible support from various liquidity alternatives for regional banks after being tainted by SVB and Signature and the First Republic swoon. Slowing depositor outflows made some headlines while Washington and the regulators kept jawboning support (with Yellen doing some more “cleanup in Aisle 3” in her language). That helped rally IG spreads in particular, and the market saw material retracement in US HY.

The above chart updates the cross-section of regional bank equities we have been looking at in recent commentaries to capture a broader picture of the sector.  We lined them up from best performance to worst performance for the period from 3-8-23 (just before the SVB implosion) through Friday March 31.  The ugly performance does not need a lot of explaining at this point.

While the SVB situation has been picked over (see Silicon Valley Bank: Loans and Haircuts 3-27-23, SVB Reprieve: Hail Powell the Merciful 3-12-23, Silicon Valley Bank: Depositor Frames of Reference 3-12-23, Silicon Valley Bank: How did the UST Curve React? 3-11-23), the next question is not just how depositors will react but also what actions the banks will be promising to calm nerves in earnings season. In theory, many will be discussing adjustments on funding and liquidity “defense” in the periods ahead to guard against any fresh cases of nerves.

The expectation of more defensive lending and what that means for credit contraction risk will be a theme that will not go away for some quarters (see Risk Appetites Get Bloodied 3-15-23) The banks will need to detail more efforts to build up liquidity in cash and equivalents and more short-term defensive assets to protect earnings from loan loss reserve surprises.

Stockholder and depositor perception will need some steady reassurance along the way. For depositors, that might include some higher payouts to take the edge off the flight to money markets and higher short UST rates. That could immediately flow into downward revisions on net interest margins and could roil stockholders, but we would expect the depositor flow data to be more important to stockholders at this point than some fine tuning of NII metrics. That will just have to play out. 

The above chart updates where the European banks have followed up on the CSFB meltdown with the profile of equity returns not as grim as what we see in the US regionals. For the period from 3-8-23 to 3-31-23, we only see one bank (ex-CSFB) slightly worse than -20.0%. The US regionals were uglier.