Banking Crisis: Rise of Banks Slows; Moody's is targeting these banks with rating downgrades
Banks' rally slowed on Tuesday after major indexes gave up early gains. First Republic, Charles Schwab, Fidelity National Financial (FIS) and Citigroup (CI) are leading the S&P 500. But Zion, III (FITB), Financial Districts (RF) posted slight gains after briefly turning negative after a morning rebound. Amid optimism linked to moves by the FDIC on Monday to contain what appears to be a widening banking crisis.
The FDIC closed and took control of Silicon Valley Bank, a subsidiary of SVB Financial (SIVB), and Signature Bank on Friday and Sunday, respectively. Banking activities resumed on Monday while the Fed is looking for corporate buyers. Regulators agreed to a systematic exemption of risk for both banks to ensure that "all depositors of the institution will be made whole".
The bank worked on Tuesday
First Republic led Tuesday's recovery, jumping 27.8% after FRC stock breached 61.8% Monday. Charles Schwab (SCHW) closed up 9.2% on Tuesday as shares were on track to post their biggest drop ever. Fidelity National stock rebounded 7% on Tuesday after falling 12.9% on Monday. Citi stock rose 5.9% on Tuesday, and Keycorp (KEY) stock rose 6.9% after falling 27% Monday. Western Alliance stock jumped nearly 14.3% after briefly turning negative.
Zions Bancorp (ZION) stock rose 4.5% on Tuesday after turning negative after an initial rebound of 14.5% on Tuesday. Shares tumbled 25.7% yesterday. FITB closed 0.5% higher and Financial Districts gained 0.6% after falling in the afternoon. Huntington Bancshares fell 0.63% on Tuesday.
Moody's cuts the credit rating of banks, and reviews six banks
Late Monday, Moody's Investors Service cut its outlook on the US banking system to negative from stable, CNBC reported. “We changed to negative from a stable view of the US banking system to reflect the rapid deterioration in the operating environment following the filings of Silicon Valley Bank (SVB), Silvergate Bank and Signature Bank (SNY) and the failures of SVB and SNY,” the ratings agency wrote.
Moody's expects pressure to continue while interest rates remain high. "U.S. banks are also now facing a sharp rise in deposit costs after years of lower funding costs, which will reduce profits for banks, especially those with a larger proportion of fixed-rate assets," Moody's said. The agency also indicated that banks that suffer large losses in unrealized securities and uninsured depositors are still at risk.
Moody's also announced that it is reviewing six regional banks for potential ratings downgrades to reflect the "highly volatile funding conditions of some US banks that are at risk from an outflow of uninsured deposits."
First Republic Bank, Intrust Financial, UMB Financial (UMBF), Zions Bancorp, Western Alliance Bank, and Comerica (CMA) all received downgrade warnings. The agency will focus its review on changes in the amounts of bank deposits since the beginning of the year, the “steadiness” of deposits in the future, and the amount of securities sold to address deposit outflows.
FDIC moves
When the FDIC acquired Silicon Valley and Signature Bank, they removed senior management and moved the assets to a bridge bank, a full-service bank that the agency will run while it finds potential bidders. Organizers failed at the SVB auction over the weekend and are planning a second auction, though the timeline is unclear, the Wall Street Journal reports.
As part of the systemic risk exceptions, "depositors will be made whole," while shareholders and some holders of unsecured debt will not be protected. "No losses will be taken by taxpayers," government officials said, and they will be funded by fees being paid to the Deposit Insurance Fund, President Biden said Monday. And Sunday, the Federal Reserve announced that it would provide additional funding to eligible institutions to ensure banks can meet all of depositors' needs.
Bank stocks fell on Monday, and the market rebounded after Biden's comments
The market opened lower on Monday. Stocks fell sharply higher around 9:50 a.m., as President Biden discussed measures taken to avoid a crash.
He said in televised remarks: "Thanks to the swift action taken by my administration over the past few days, Americans can have confidence that the banking system is safe." Biden said he would ask Congress and regulators to strengthen banking rules "to make this kind of bank failure less likely to happen again."
Financial stocks extended their declines on Monday after Friday's dramatic losses, with most of the aggressive selling focused on banks near Silicon Valley. Trading in San Francisco-based First Republic was paused early Monday after FRC stock fell 61.8% after trading resumed.
Shares of Western Alliance Bancorp (WAL) plunged 80 percent after Monday's opening bell, bringing short trading to a halt. The stock closed down 47%. Pacwest Bancorp (PACW), based in Phoenix, recouped losses to close down 21% Monday, after an early halt in trading. Salt Lake City-based Zions fell 25.7% on Monday.
Some of the non-Western banks that fell into scrum scope included First Horizon (FHN). Trading in the Memphis-based bank was halted briefly Monday as FHN stock fell 20.2%. The Birmingham, Ala.-based District Financial (RF) was temporarily shut down during the day and was down 7.1%.
Charles Schwab (SCHW) closed down 11.6% after dropping 23% Monday morning. Schwab's stock is on track for its biggest drop ever. Bank of America (BAC) fell 5.8%. Schwab is headquartered in Texas, BAC in Charlotte, NC
Dow Jones JPM pared early losses to 1.8% on Monday. It rose 2.5% on Friday, which is one of the few bright spots in the banking sector today.
Western Coalition and Federal Home Loan Banks Backs Reserves
Western Alliance Bank increased its borrowing capacity and took "additional steps to strengthen its liquidity position to ensure that we are in a position to meet all of our customers' funding needs," CEO Kenneth Vecchione wrote in a filing Monday with the SEC. As of Monday morning, Vecchione wrote, its cash reserves were over $25 billion "and growing," while deposit outflows were moderate. Insured bank deposits, including accounts eligible for traffic insurance, exceed 50% of total deposits.
Elsewhere, the Fed's Home Loan System raised $64 billion in short-term bond sales, Bloomberg reported Monday. The bank system is a major supplier of cash to regional banks without resorting to the Federal Reserve, and it increases its available capital in case more banks need to tap it for funds.
Bank Crisis: Signature Bank is closed
On Sunday, state regulators shut down New York-based Signature Bank and designated the FDIC as the recipient. Signature Bank is the 20th largest bank in the US, and nearly 30% of its deposits came from crypto clients.
The FDIC transferred all deposits and "substantial" all assets to Signature Bridge Bank. The Bridge Bank is a full-service bank, and the agency will market the organization to potential bidders.
As of December 31, Signature Bank had $110.4 billion in total assets and $82.6 billion in deposits. Signature Bank operations and banking activities will resume on Monday 13 March. The organizers guarantee that "all the depositors of the institution will be made whole. The taxpayers will not suffer any losses." In a joint press release Sunday, Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and FDIC Chairman Martin Gruenberg approved systemic risk exceptions for Signature Bank to allay fears of a banking crisis.
"Today we are taking decisive action to protect the US economy by strengthening public confidence in our banking system," the regulators wrote in the statement. “This move will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a way that promotes strong and sustainable economic growth.”
Special evaluation of banks
Regulators agreed to similar systemic risk exceptions for Silicon Valley Bank. Shareholders and some unsecured debt holders will not be protected. In addition, officials have fired senior management, according to the announcement. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered through a special assessment on the banks, as required by law. And Sunday, the Federal Reserve announced that it would provide additional funding to eligible institutions to ensure banks can meet all of depositors' needs.
“The US banking system remains resilient and on a solid footing, due in large part to reforms introduced after the financial crisis that ensured better safeguards for the banking industry,” the regulators wrote. “These reforms, combined with today’s actions, demonstrate our commitment to taking the necessary steps to ensure that depositors’ savings remain safe.”
The first republic to support funds
On Monday, First Republic CEO Jim Herbert told Jim Kramer that the bank was "business as usual," that there weren't many liquidations over $250,000, and that additional funding from JPMorgan was working.
On Sunday, First Republic Bank (FRC) secured additional liquidity from the Federal Reserve and JPMorgan (JPM) to support its operations. The company announced in a press release that the additional borrowing capacity brings the total available and unused liquidity to fund operations to more than $70 billion.
"First Republic's capital and liquidity positions are very strong, and its capital remains well above the regulatory limit for well-capitalized banks," First Republic CEO Jim Herbert said in the announcement.
Meanwhile, Bank of America on Monday removed its rating price target on First Republic, from its previous Buy rating and $90 price target. Bank of America wrote in a research note that unexpected banking failures had put First Republic "trading on fundamentals stalled," and made previous targets unreliable.
first republic bank stock" huntington bank stock"
PacWest Operations Update
On Friday, after the failure of the Silicon Valley bank, BackWest Bancorp issued an update on its current liquidity operations. PacWest Bank had $41 billion in assets and $33.2 billion in deposits as of March 9th. The Los Angeles-based bank lists $28.3 billion in loan balances, $1.9 billion in cash on hand, $5.3 billion in liquid securities and about $2 billion available from the Federal Reserve discount window.
“Although the banking industry is experiencing significant ups and downs in light of recent events, we would like to reaffirm that Pacific Western Bank is a well-functioning, diversified, full-service commercial bank with over 20 years of history,” CEO Paul Taylor said in the statement. “We have been a proven partner for our clients through all economic cycles and are actively adapting to the current economic environment.”
After the update, DA Davidson analyst Gary Tenner upgraded PacWest to Buy from Neutral on Monday, but lowered its price target to 29 from 31. The bank's financial update was broadly in line with the company's outlook for the first quarter, despite contagion concerns, Tenner wrote. in a research note.
Rising cryptocurrency prices
Meanwhile, cryptocurrency prices rose on Monday after jumping Sunday following the FDIC's statement on the signature bank. Coinbase (COIN) pulled down more than 9% after announcing that it expects a "full refund" of its deposits from Signature. The stablecoin USD Coin reclaimed the $1 level on Monday after losing its currency peg to the dollar and fell to 86 cents on Saturday. Bitcoin and Ethereum both jumped in double-digit gains on Monday.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
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