Larger Banks Are Facing Liquidity Issues

MCCAIGWe have written quite extensively over the last several years as to why it’s a huge misunderstanding to believe that the largest U.S. banks will be safer than smaller banks in a systemic crisis scenario. Last week, we published an article in which we discussed that the largest banks (assets > $250B) posted the sharpest increase in the CRE delinquency ratio, according to the FDIC. The FDIC also reported that larger U.S. banks (assets > $100B) have significantly underperformed the rest of the banking sector in terms of deposit dynamics. Larger banks posted a 6.8% outflow, while community banks showed a 1% increase. The FDIC has recently published another very interesting set of data. According to the regulator, the sector’s ratio of liquid assets to total assets fell to 26% in 4Q23, which is the lowest since the end of 2013. This decline in liquid assets was due to significant deposit outflows posted by the largest U.S. banks. As the chart below shows, banks had to sell securities. FDIC In response to deposit outflows and falling liquidity levels, banks had to attract wholesale funding, which is volatile and more expensive than deposit funding. Unsurprisingly, that made the liquidity profile of the U.S. banking sector weaker. FDIC concluded the following (emphasis is ours): In 2024, tighter liquidity positions and higher reliance on wholesale funding will increase funding risk for some banks should market stress or rapid changes in market conditions occur. Even if market interest rates decline in 2024, banks with low liquidity positions, higher unrealized securities losses, insufficient access to off-balance-sheet secured borrowing lines, or volatility in deposit retention may continue to experience heightened liquidity pressure. Of course, the most interesting thing here is how all these changes in liquid assets and funding sources have affected the banks’ net interest margins. For starters, this indicator is calculated by dividing a bank’s total net interest income by its average interest-earnings assets. The ratio is among the key performance indicators of any bank and its main earnings driver. The banking industry’s median NIM increased in 2023. However, only 53% of banks reported an increase in NIM in 2023 compared to 66% in 2022. Importantly, 65% of larger banks posted declines in their NIMs. As such, the industry’s metric was supported by smaller community banks. The chart below demonstrates this as 53% of banks with assets of $100MM–$1B and 71% of banks with assets less than $100M delivered a positive change in the margins. FDIC Bottom line Believe it or not, there are more major issues on larger bank balance sheets relative to smaller banks, which we have covered in past articles. Moreover, consider that there was one major issue which caused the GFC back in 2008, whereas today, we currently have many more large issues on bank balance sheets. So, in our opinion, the current banking environment presents even greater risks than what we have seen during the 2008 GFC. Almost all the banks that we have recommended to our clients are community banks, which do not have any of the issues we have been outlining over the last several years. Of course, we’re not saying that all community banks are good. There are a lot of small community banks that are much weaker than larger banks. That’s why it’s absolutely imperative to engage in a thorough due diligence to find a safer bank for your hard-earned money. And what we have found is that there are still some very solid and safe community banks with conservative business models. So, I want to take this opportunity to remind you that we have reviewed many larger banks, including the three just noted, in our public articles. But I must warn you: The substance of that analysis is not looking too good for the future of the larger banks in the United States, and you can read about them in the prior articles we have written. And, as these issues get worse, the risk continues to rise. Moreover, if you believe that the banking issues have been addressed, I think that New York Community Bancorp, Inc. (NYCB) is reminding us that we have likely only seen the tip of the iceberg. We were also able to identify the exact reasons in a public article which caused SVB to fail, well before anyone even considered these issues. And I can assure you that they have not been resolved. It’s now only a matter of time before the rest of the market begins to take notice. By then, it will likely be too late for many bank deposit holders. At the end of the day, we’re speaking of protecting your hard-earned money. Therefore, it behooves you to engage in due diligence regarding the banks which currently house your money. You have a responsibility to yourself and your family to make sure your money resides in only the safest of institutions. And if you’re relying on the FDIC, I suggest you read our prior articles, which outline why such reliance will not be as prudent as you may believe in the coming years, one of the main reasons being the banking industry’s desired move towards bail-ins. (And, if you do not know what a bail-in is, I suggest you read our prior articles.) It’s time for you to do a deep dive into the banks that house your hard-earned money to determine whether your bank is truly solid or not. You are welcome to use our due diligence methodology outlined here. Housekeeping Items This article, as well as Saferbankingresearch.com, is a combination of efforts between Avi Gilburt and Renaissance Research, which has been covering U.S., European, LatAm, and CEEMEA banking stocks for more than 15 years. If you would like notifications as to when my new articles are published, please hit the button at the bottom of the page to “Follow” me. Also, for those who are questioning why all comments (including mine) go through moderation, you can read here: Haters Are Gonna Hate – Until They Learn.

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