US regional banks remain under pressure as First Republic sinks

BLOOMBERG

The positive effect from the American regulators’ overnight support actions in the banking system quickly evaporated, with stocks signalling that fallout from the incident is far from over.
S&P 500 futures erased most earlier gains and traded little changed, while Nasdaq futures trimmed their advance and the Cboe Volatility Index spiked, set for the highest since end-October. Turmoil continued to engulf shares in regional banks as investors who saw equity stakes wiped out at Silicon Valley Bank (SVB) and Signature Bank rushed out of the industry.
First Republic Bank remained under pressure, with shares plunging 70% in US premarket trading even after the lender moved to try and quell concern about its liquidity after the failure of SVB. PacWest Bancorp lost more than 40%, Western Alliance Bancorp sank 30%, Charles Schwab Corp dropped about 20% and Zions Bancorp fell 15%. Comerica Inc slid 7%.
While higher rates are often thought to buttress interest income, the issue is complicated in 2023 by a steeply inverted yield curve that depresses yields on longer-dated assets versus short-term liabilities. Retaining deposits is hard when money market rates are as much as 50% higher than interest paid on savings accounts. And if deposits flee, banks may be forced to book what had only been paper losses on mortgage bond and Treasury holdings they are forced to sell.
The buckling shares highlighted that even after emergency measures by US regulators, including a new backstop for banks, investors remained on edge that more seizures were possible. Broadly, the government actions bolstered markets, though overnight gains wobbled as investors poured into fixed income investments. The latest crisis poses a risk to the strong rally seen in US and European shares since October.
“The market has been shaken by the recent events and the positive mood cannot return in the short term so I would eventually expect more weakness and more scrutiny from the market to some leverage situations and illiquid assets,” said Alberto Tocchio, a portfolio manager at Kairos Partners. “There will be a search for the next victim and the recession probability is set to increase over the next weeks.”
European stocks retreated the most since mid-December amid a drop in banking shares after HSBC Holdings Plc agreed to buy the UK arm of Silicon Valley Bank. Biggest fallers included Commerzbank AG, BAWAG Group AG and Banco BPM SpA. Credit Suisse Group AG slumped as much as 15%. Italy’s FTSE MIB Index underperformed other regional benchmarks due to its large exposure to banks.
“After the liability-driven investment fund crisis in autumn 2022, we see this is another episode where parts of the financial system are hit by the unwinding of accommodative central bank policy,” said Deutsche Bank analyst Benjamin Goy.
While US regulators introduced a new backstop for banks that Federal Reserve officials said was big enough to protect the nation’s deposits, the surprise announcement that New York’s Signature Bank was being shuttered reminded investors that further turmoil, at least among regional banks, was still possible. A senior US Treasury official said some institutions had issues similar to the failed Silicon Valley Bank.
Most large US banks also erased earlier gains in US premarket trading, with JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co all trading lower.
“We’re seeing a liquidity withdrawal, the classic thing that you’d expect following a credit event like what’s happening at SVB,” said Haig Bathgate at Atomos Investments.