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Bank Stocks Can’t Catch a Break With Rates Staying Elevated
by Bloomberg News
September 27, 2023

There may not be respite in sight for beaten-down bank stocks as attention shifts to 2024 and a prolonged period of elevated rates, according to analysts.

Midsized banks are “not out of the woods yet,” said Morgan Stanley’s Manan Gosalia in a note on Wednesday. Meanwhile, Wedbush and Truist Securities analysts said the group will continue to be challenged in 2024.

“‘Survive until 2025’ is a phrase that has been recently attributed to [commercial real estate] investors/borrowers, but we think the saying also applies to Regional and Community banks as higher interest rates weigh on profitability,” Truist Securities analyst Brandon King wrote.

Bank stocks have been roiled this year by the collapse of multiple regional lenders, including Silicon Valley Bank. The sector has failed to stage a meaningful rebound since the tumult began in early March, with the KBW Bank Index down 23% this year, compared to a 11% gain for the S&P 500 Index.

The sustained pressure that banks face having to pay more to hang on to their deposits amid high interest rates adds to the list of woes for the hard-hit group, which is also facing heightened regulatory expectations. Those issues, combined with uncertainty around credit resilience in an economic downturn, have pushed investors to the sidelines even as the sector’s valuations have cheapened.

“Street estimates are too optimistic for 2024 net interest income in a higher for longer environment,” Gosalia wrote.

Gosalia, who cut his recommendations on Zions Bancorp and Valley National Bancorp to underweight Wednesday, expects the upcoming third-quarter earnings season to be a so-called sell-the-news event.

Wedbush’s David Chiaverini anticipates upcoming earnings will be “underwhelming,” but that net interest income guidance cuts should be less harsh than in recent quarters. He’s still maintaining a cautious outlook for the sector, saying that consensus estimates for 2024 may be elevated because they probably incorporate funding cost relief given prior expectations for more significant rate cuts.

“The acute phase of bank stress is clearly over, but in its wake several challenges have become exacerbated including funding challenges, balance sheet constraints, dampened loan demand, and potential negative credit migration as CRE maturities are dealt with,” he wrote. “We believe these headwinds could weigh on bank valuations into 2024.”

END of Article

What does this article mean for YOU?

As an Advisor, I look at financial reports (Profit/Loss statements, Cash flow, Balance sheets, etc.).

The FDIC is an insurance company, and before I recommend a carrier for insurance coverage, I look at their balance sheet.

Specifically, I'm very interested in their reserves capacities. If you don't have the claims reserves to pay claims, you're not an "insurance company"; you're a fraudulent entity posing as an insurance company.

First, let's look at the FDIC balance sheet. It tells us the WHOLE story of why this article is relevant. It also opens the reasoning as to why YOU should be concerned whether you're a private citizen or a public (any commercial entity) company.

FDIC opened 2023 (January) with $123BB in assets. In March, they had 3 claims from insolvent banks - Silicon Valley, 1st Liberty, and Signature Banks could not keep their reserves available because of poor regulation/oversight and poor internal asset management (IMHO). Just 3 banks required over $34BB to resolve the issues for depositors who lost funds when these banks went into receivership. That leaves a net reserve capacity (notwithstanding additional insurance premiums paid by 4,844 other Federal Reserve Banks (FED banks) of approximately $84BB. The problem isn't the $84BB remaining. The PROBLEM is the 4,844 other banks who have toxic assets due to rising interest rates from the FED.
***Editor note 12/07/2023 - As of their end of July statement, FDIC has only added an additional $750 million to their reserves.

WHY Bank Assets Are Toxic
When a Bank loans money that it retains in its portfolio, that is an "asset" to the Bank, and a liability to the Borrower. When YOU deposit cash in a savings/CD, etc. that is a LIABILITY to the bank and an asset to YOU. Bank assets include loans they make, and investments in other entities like Treasury Notes, Bills, and Bonds (among other things).

An asset is determined to be "toxic" (to the bank) when it cannot be sold from the bank asset portfolio due to substantial loss of principal value, or risk of insolvency or other concerns regarding the ability to liquidate (sell) the asset at par or a premium above par.

Federal US Teasury debt has yielded approximately 1.5 - 2.25% yields for the past 8 years. Many Banks (of the 4,844) have been laddering these 30 yr long treasury Bonds as an ongoing matter of practice. This is akin to "Dollar Cost Averaging" in your 40?/457 pension plan where you work. High and low interest rates over time help reduce cost and blend rates to provide steady and reliable interest income. This is an acceptable practice until the FED announces (2022 Feb) their intention to start raising interest rates to alleviate inflation.

US 30 yr duration Treasury Bonds (the most typical bonds found in bank portfolios) are generally sold incrementally at $1,000/bond (aka "PAR"). When interest rates RISE, bond values (the "PAR" price of the bond paid at issue) FALLS.

So what was paid initially 4-6 yrs ago to acquire a 1.75% yield coupon Treasury Bond @ $1,000 with a 30 yr duration isn't worth $1,000 per bond when Fed rates climb to 4.5%. If you think about it, ask yourself this question - "Why would I buy a bond yielding 1.5% when I can buy a brand new bond @4.5%?" The answer is, you wouldn't. You would expect the holder of the 1.5% paper (bonds are referred to as "paper") to substantially DISCOUNT the par value from $1,000 down to possibly $600 (+/-).  Imagine the Bank portfolio holding 40% of its assets in US 30 yr Treasury bonds and this happens? To come up with the cash needed to take care of depositor demands would be a terrible hit on assets (in combination with the requirement to mark these bonds to the market with regard to their actual value. IOW, to not correct the valuation of the low rate paper to correctly reflect the value inside the Bank's portfolio is fraud. So, 40% of the portfolio losing 40% of par would correct the value to show a 16% loss of equity. (40% of X / 40% discount to par).

A look at the annual prices for Bank stocks in Honolulu, HI (I believe) shows a direct negative correlation of fed rate hikes and a corresponding loss of stock price value. If you live in a Condo or Homeowners association in Honolulu or (Hawaii in general) go ask your board Treasurer "where is the reserve account held?"

Most likely, at a Hawaii bank savings account earning 1/10th of nothing and WELL OVER the FDIC insurance limits of $250,000.00.

Did you know the FDIC is under no obligation to insure and indemnify losses that exceed the insurance limits? FACT. The FDIC can also defer the repayment of eligible/insured deposit funds on a repay schedule of 5% per year over a 20 year deferral? (FDIC hates when I point this out). The FDIC is STILL repaying claims from 2008-9.

You're actually doing your Board a great favor in kindness as they have "vicarious responsibility" for anything that goes wrong.

Here's the logic behind the fact that all of the reserves of your association are in the bank and earning nothing: "The board has a fiduciary responsibility to keep the reserves in a "safe and liquid manner". That doesn't mean "high risk, high yield"; It means they should sacrifice yield on the altar of safety and liquidity. I agree with this principle of principal. The flaw in their thinking is that in almost all cases, they have ignored the "undue concentration" of having it all in one account in one bank. There aren't very many ways to divide a deposit like that and still have the FDIC protections if $250,000 per account. The deposits are only as safe as the deposit insurance, and 3 banks used up 25% of their reserve account, with 4,844 other banks waiting to see if they survive the next round of interest rate hikes by the FED.

That's right. (Not counting) the new premiums paid into the reserve claim account, just 3 bank failures used 25% of the reserves, and only 8-10/4,844 more failures would seriously compromise their claim paying abilities. (BTW,"inflation" is over 25% presently;  the FED is NOT done raising interest rates, which will trigger more failures as banks continue to become more insolvent. The time to sell those 1.5% - 2% 30 yr bonds would have been no later than before March of 2022. Neither the regulators for the FDIC or the bank wealth management caught or saw this coming, and so, here we are on the cusp of (what I see to be) the greatest banking failure since the 1930's depression. The banks simply cannot afford to sell off these assets, and they can't afford to hold them until FED interest rates return to record low levels.

If your Condo association had $2mm in a deposit account for safe keeping, and the bank fell into FDIC receivership, what would happen to the deposits above the limit? What would that loss do to your Association solvency?

It doesn't get better when you realize how much of the asset portfolio (60% remaining) is invested in Corporate Bonds that are not federally guaranteed/backed.

The Banks have no reserves. They have a ZERO deductible insurance plan through the FDIC. It (appears) the FDIC hasn't taken in the premium needed to cover the losses caused by the act of raising interest rates to stop inflation. YOU PAY for that insurance with higher loan rates and lower savings rates.

If this all sounds absurd and incompetent? You get it.

I would URGE anyone who is in a Condo association who has reserves in the bank with undue concentration to CALL US TODAY. I have solutions that will satisfy the Board of Director's fiduciary responsibility for safety and liquidity that eliminates the bank FDIC insurance and solvency issues. 808-464-5292 Dan Turner, Akamai Wealth Management, LLC; CRD #322422

"Bloomberg News" is an Independent Business/Financial News reporting source; "Advisor Hub" is a professional Financial Advisory website. All expressed opinions below the end of that article is covered by Copyright 2023 Akamai Wealth Management, LLC Daniel J Turner, Principal Advisor, All rights reserved.

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Daniel J Turner, Principal Advisor
Akamai Wealth Management, LLC
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Honolulu, HI 96813
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808-464-5292 direct

Advisory services are offered through “Akamai Wealth Management, LLC”. (AWM) a registered Investment Advisor registered in the State of Hawaii.

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