Over the last few months, regional US banks balance sheets remained under severe pressure as clients were searching for security and higher yields. Some institutions, such as Charles Schwab, which though operates in a broader arena than most regional banks, were able to attract new customers and new funds.
However, there is a catch 22 for these bank as they have to demonstrate the ability to retain these newly gained clients and assets since the environment has changed. In fact, it has become much more dynamic, with some analysts expecting some more incidents. As for now, the market concerns are for PacWest Bancorp (PACW) and Western Alliance Bancorporation (WAL).
At Charles Schwab Corporation (SCHW), which is one of the few regional banks to communicate on a regular basis about AUM flows, deposit cancellation have decelerated for the 3rd consecutive month, in total Schwab has lost about $1B in AUM ever since January 2023.
ETFs tracking banking stocks (IAT and KRE) have been on a roller-coaster too in the recent weeks. With the entire sector in turmoil, these two ETFs have fallen to the level of March 2020! Is this a buying opportunity? Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett sounded a word of caution for bank stock investors at the company’s annual meeting. The Oracle of Omaha stressed that, while there is a deposit guarantee of $250k per account, he reminded investors every event starts creating a different dynamic of which the outcome is unclear for now. In other words, we are still in this move where investor’s negative psychology can go further than any risk management strategy of a bank.
Last week, Bloomberg’s Matt Levine highlighted in a publication why “nobody trusts the Banks now”. In essence and according to him, the current banking crisis had unveiled a critical flaw that relied on the intangible assets of “relationships” to help mitigate the asset-liability mismatch risks that banks face. Levine added: Relationship businesses in general are on the decline. In a world of electronic communication and global supply chains and work-from-home and the gig economy, business relationships are less sticky.
What is our take on this statement?
As “relationship businesses” appear to decline at the expense of online, only low-cost operators with a large and diversified client base will most likely have the flexibility to impact the business with a true value proposition and an innovative product offering.