CAMS Weekly View from the Corner – Week ending 6/23/2023
June 26, 2023
While it seems in the collective narrative that – “banking issue” – has moved to the back seat if not left the scene completely collective market participants via their trading of bank stocks have not let up on their concerns for the industry. Interestingly, this holds true for the broader financial industry – generally speaking. The important aspect to this is in particular for the banking industry is they are at the epicenter of the economic/financial system. We could think of them as a proverbial canary in the economic coal mine. With this they do not appear to be very healthy looking and are tacking on more concern in recent days. Months ago when the banking system began to show notable issues with various bank failures there was a view if not concern that smaller regional banks would be particularly vulnerable while larger banks would be relatively fine. At the time we shared this chart of the two in ratio format.
Click For Larger View: https://schrts.co/XTfZuBJr
The above dates back to the financial crisis of 2008 for perspective of the last time there was a notable banking issue. This ratio chart places the stock prices of larger banks to regional banks. If the line is moving down (or collapsing as in 2008) then market participants are selling off large banks far more rapidly than they are small banks. Conversely, if the line is jettisoning upward then market participants are selling off small bank stocks far more rapidly than they are large banks stocks. As we can see the line has moved gently upward (no spikes) with it pausing in recent weeks. The above is a weekly chart so the pause area to the far right actually depicts a couple of months of time. (An important caveat for the above chart is this does not mean every large bank is being treated the same as is also true for every regional bank. The above chart uses two vehicles that hold larger oriented banks and smaller regional oriented banks. The chart and its message are meant to give us a general view of the bank pricing landscape relative to size of banks.) As shared the concern if not expectation was small banks were doomed. We created and shared the above as a one stop chart if you will to monitor how market participants were viewing the situation. If they felt the same as the general concern then the above chart would move rapidly and relentlessly higher. At this stage, in particular the previous couple of months, they have treated both large and small banks the same relative to the pricing of their stocks. Deposit Flight The central concern has been deposit flight generally and in particular smaller regional’s experiencing such to a far greater degree than the larger players. This as depositors seek higher rates of interest in various instruments outside of the traditional banking system deposit structure. To date the concern has been unwarranted in the sense that both have experienced deposit flight as our charts below depict.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=16qtO
Click For Larger View: https://fred.stlouisfed.org/graph/?g=16quw
Both charts above represent the previous ten years of deposit history by bank size. We offer a ten year view in order to focus more clearly on recent levels of deposit flight.
The first chart represents Small Domestically Chartered Commercial Banks while the second chart identifies Large Domestically Chartered Commercial Banks. As the data reflects both have experienced similar storylines in deposit flight with downtrends depicted via our red arrows.
On a year-over-year percentage basis (not shown) both have experienced similar decreases throughout their downtrends. This leaves banks, thus far, in similar situations relative to deposit flight regardless of size.
This makes sense through the lens of depositors seeking higher interest rates relative to traditional deposit rates in that a lower comparative interest rate received regardless of size of the institution still equals a lower interest rate received and hence incentivizing depositor’s to seek alternatives. In addition, the government has essentially backstopped all deposits – a larger story which is outside of the context of this edition.
Liquidation Issues
The problem with deposit flight is the bank in question is forced to liquidate holdings in order to meet the fleeing of depositor’s money. If those holdings, say government bonds for example, are currently valued much less than what they are being held on the books at then said bank incurs actual losses in the process.
This is the issue currently relative to deposit flight concerns. An equal if not larger concern is a topic we have shared in numerous editions ad nauseam. That is a recession watch through many metrics.
The point relative to the banking system is with the onset (if this occurs or should we offer when it occurs – growth does not continue infinitely) of recession bank balance sheets take on additional stress with their loan portfolios.
The underlying assets within their loan portfolios historically reduce in price which brings on its own storyline of issues.
Overall Market Participants are Unimpressed
Click For Larger View: https://schrts.co/FHNwmVPh
The above gives us a year-to-date visual on how market participants have treated the stock prices of large and small banks via the two banking vehicles we used to make our ratio chart at the outset of this edition.
Regardless of size market participants are treating bank stocks collectively very poorly and are clearly unimpressed with their near-term outlook. Per the chart above both are down heavy double digits thus far in 2023 and both have begun to turn south again in the previous couple of weeks.
If these bank stocks find a way to put in an even lower low odds are high the overall stock market will feel some of that stress. We watch with concern of their recent turn lower after they were working on putting in a bottom.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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