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Shelby McFaddin, investment analyst at Motley Fool Asset Management, joins ‘The Exchange’ to discuss First Republic Bank’s earnings expectations, depositor trust in FRC, and the impact of slowdown in consumer spending on McDonalds.
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Tag: First Republic Bank
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Moody’s Downgrades 11 Regional Banks, Including Zions, U.S. Bank, Western Alliance
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Moody’s Downgrades 11 Regional Banks, Including Zions, U.S. Bank, Western Alliance
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Jamie Dimon issues warning on rates: ‘It will undress problems in the economy’
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Jamie Dimon, chief executive officer of JPMorgan Chase & Co., during a Bloomberg Television interview in London, U.K., on Wednesday, May 4, 2022.
Chris Ratcliffe | Bloomberg | Getty Images
Investors and businesses should plan for interest rates to remain higher for longer than currently expected by the market, according to JPMorgan Chase CEO Jamie Dimon.
The world saw what happened last month when higher rates and a sudden deposit run exposed bad management at Silicon Valley Bank. Earlier, rising rates and a surging dollar sparked a meltdown in U.K. sovereign debt last September, Dimon reminded analysts Friday during a conference call.
“People need to be prepared for the potential of higher rates for longer,” Dimon said on the call.
“If and when that happens, it will undress problems in the economy for those who are too exposed to floating rates, for those who are too exposed to refi risk,” he said, referring to loans that reset at market rates. “Those exposures will be in multiple parts of the economy.”
Higher rates jammed up swaths of the economy this year, from regional bankers who had bet on low rates to consumers who can no longer afford mortgages or credit card debt. The Federal Reserve has pushed its core rate higher by roughly 5 full percentage points in the past year as it sought to subdue stubbornly high inflation.
Ironically, it was the recent regional banking crisis that sparked wagers that an economic slowdown would force the Fed to pivot and cut rates later this year. That assumption has helped underpin stock levels in recent weeks on the hope for a return to a lower-rate environment.
More bank failures?
For its part, the biggest U.S. bank by assets studies how benchmark rates closer to 6% would impact the company, Dimon said. That flies against market assumptions that the Federal Reserve will begin cutting rates in the back half of this year, reaching below 4% by January.
Dimon said he told “all” his bank’s clients to prepare for the risk of higher rates.
“Now would be the time to fix it,” he said. “Do not put yourself in a position where that risk is excessive for your company, your business, your investment pools, etc.”
Higher rates would put additional pressure on mid-sized banks like First Republic that were damaged in last month’s tumult; the value of their bond holdings moves lower as rates rise. First Republic is being advised by JPMorgan and Lazard.
While he expects regional banks to post “pretty good numbers” next week, there is the risk of “additional bank failures,” Dimon said.
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JPMorgan Chase is set to report first-quarter earnings – here’s what the Street expects
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Jamie Dimon, chairman and chief executive officer of JPMorgan Chase & Co., during a Bloomberg Television interview at the JPMorgan Global High Yield and Leveraged Finance Conference in Miami, Florida, US, on Monday, March 6, 2023.
Marco Bello | Bloomberg | Getty Images
JPMorgan Chase is scheduled to report first-quarter earnings before the opening bell Friday.
Here’s what Wall Street expects:
- Earnings: $3.41 per share, 29.7% higher than a year earlier, according to Refinitiv.
- Revenue: $36.24 billion, 14.7% higher than a year earlier.
- Deposits: $2.31 trillion, according to StreetAccount.
- Provision for credit losses: $2.27 billion.
- Trading Revenue: Fixed income $5.29 billion, Equities $2.86 billion.
JPMorgan, the biggest U.S. bank by assets, will be watched closely for clues on how the industry fared after the collapse of two regional lenders last month.
Analysts expect a mixed bag of conflicting trends. For instance, JPMorgan likely benefited from an influx of deposits after Silicon Valley Bank and Signature Bank experienced fatal bank runs.
But the industry has been forced to pay up for deposits as customers shift holdings into higher-yielding instruments like money market funds. That will probably curb banks’ gains from rising interest rates amid the Federal Reserve’s efforts to tame inflation.
The flow of deposits through American financial institutions is the top concern of analysts and investors this quarter. That’s because smaller banks faced pressure last month as customers sought the perceived safety of megabanks including JPMorgan and Bank of America. But the bigger picture may be that deposits are leaving the regulated banking system overall as customers realize they can earn higher yields outside checking and saving accounts.
Another key question will be whether JPMorgan and others are tightening lending standards ahead of an expected U.S. recession, which could constrict economic growth this year by making it harder for consumers and businesses to borrow money.
Banks have begun setting aside more loan loss provisions on expectations for a slowing economy later this year, and that could weigh on results. JPMorgan is expected to post a $2.27 billion provision for credit losses, according to the StreetAccount estimate.
Wall Street may provide little help this quarter, with investment banking fees likely to remain subdued thanks to the still-shut IPO market. CFO Jeremy Barnum said in February that investment banking revenue was headed for a 20% decline from a year earlier, and that trading was trending “a little bit worse” as well.
Finally, analysts will want to hear what JPMorgan CEO Jamie Dimon has to say about the economy and his expectations for how the regional banking crisis will develop. JPMorgan has played a central role in propping up a client bank, First Republic, which teetered last month, in part by leading efforts to inject it with $30 billion in deposits.
Shares of JPMorgan are down about 4% this year, outperforming the 31% decline of the KBW Bank Index.
Wells Fargo and Citigroup are scheduled to release results later Friday, while Goldman Sachs and Bank of America report Tuesday and Morgan Stanley discloses results Wednesday.
This story is developing. Please check back for updates.
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IMF cuts GDP forecasts, says global economy heading for weakest growth since 1990
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The International Monetary Fund has released new economic forecasts and warns that it will be hard for policymakers to bring down inflation while keeping a growth momentum.
Ishara S. Kodikara | Afp | Getty Images
The International Monetary Fund on Tuesday released its weakest global growth expectations for the medium term in more than 30 years.
The D.C.-based institution said that five years from now, global growth is expected to be around 3% — the lowest medium-term forecast in an IMF World Economic Outlook since 1990.
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“The world economy is not currently expected to return over the medium term to the rates of growth that prevailed before the pandemic,” the Fund said in its latest World Economic Outlook.
The weaker growth prospects stem from the progress economies like China and South Korea have made in increasing their living standards, the IMF said, as well as slower global labor force growth and geopolitical fragmentation, such as Brexit and Russia’s invasion of Ukraine.
These forces are now overlaid by and interacting with new financial stability concerns.
In the short term, however, the IMF expects global growth of 2.8% this year and 3% in 2024, slightly below the fund’s estimates published in January. The new estimates are a cut of 0.1 percentage points for both this year and next.
“The anemic outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, and growing geoeconomic fragmentation,” the IMF said in the same report.
Looking at some of the regional breakdowns, the IMF sees the United States economy expanding by 1.6% this year and the euro zone growing by 0.8%. However, the United Kingdom is seen contracting by 0.3%.
China’s GDP is expected to increase by 5.2% in 2023, according to the IMF, and India’s by 5.9%. The Russian economy — which contracted by more than 2% in 2022 — is seen growing by 0.7% this year.
“The major forces that affected the world in 2022 — central banks’ tight monetary stances to allay inflation, limited fiscal buffers to absorb shocks amid historically high debt levels, commodity price spikes and geoeconomic fragmentation with Russia’s war in Ukraine, and China’s economic reopening—seem likely to continue into 2023. But these forces are now overlaid by and interacting with new financial stability concerns,” the IMF warned.
Banking turmoil
The IMF said that its baseline forecast “assumes that the recent financial sector stresses are contained.” It comes after a number of banks failed in March, causing volatility across global markets.
Silvergate Capital, Silicon Valley Bank and Signature Bank all failed, with regulators taking action in an effort to prevent contagion. Since then, First Republic Bank has also received support from other lenders, and in Switzerland, authorities asked UBS to step in and acquire its struggling rival Credit Suisse.
The pressures in the banking sector have dissipated in recent weeks, but they have made the overall economic picture worse in the eyes of the IMF.
“Financial sector stress could amplify and contagion could take hold, weakening the real economy through a sharp deterioration in financing conditions and compelling central banks to reconsider their policy paths,” the fund said.
The bank failures shed light on the potential consequences of hawkish monetary policy across many major economies. Higher interest rates, raised by central banks battling to bring down stubbornly high inflation, are hurting companies and national governments with high levels of debt.
“A hard landing — particularly for advanced economies — has become a much larger risk. Policymakers may face difficult trade-offs to bring sticky inflation down and maintain growth while also preserving financial stability,” the IMF said.
The institution expects global headline inflation to drop from 8.7% in 2022 to 7% this year, as energy prices come down. However core inflation, which excludes volatile food and energy costs, is expected to take longer to fall.
In most cases, the IMF does not expect headline inflation to return to its target levels before 2025.
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EU regulators distance themselves from Credit Suisse bond writedowns
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BRUSSELS — European regulators distanced themselves from the Swiss decision to wipe out $17 billion of Credit Suisse‘s bonds in the wake of the bank’s rescue, saying they would write down shareholders’ investments first.
Dominique Laboureix, chair of the EU’s Single Resolution Board, had a clear message for investors in an exclusive interview with CNBC.
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“In [a banking] resolution here, in the European context, we would follow the hierarchy, and we wanted to tell it very clearly to the investors, to avoid to be misunderstood: we have no choice but to respect this hierarchy,” Laboureix said Wednesday.
It comes after Swiss regulator FINMA announced earlier this month that Credit Suisse’s additional tier-one (AT1) bonds, widely regarded as relatively risky investments, would be written down to zero, while stock investors would receive over $3 billion as part of the bank’s takeover by UBS, angering bondholders.
In a joint statement with the ECB Banking Supervision and the European Banking Authority, the Single Resolution Board said on March 20 that the “common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down.”
The standard hierarchy or framework sees equity investments classed as secondary to bonds when a bank is rescued.
The Swiss decision has led some Credit Suisse AT1 bondholders to consider legal action, and it sparked uncertainty for bondholders around the world.
Switzerland’s second largest bank Credit Suisse is seen here next to a Swiss flag in downtown Geneva.
Fabrice Coffrini | AFP | Getty Images
“As a resolution authority in charge of the banking union resolution framework, I can tell you that I will respect fully and entirely the legal framework. So in resolution, when adopting a resolution scheme, I will respect this hierarchy starting by absorbing equity stack, and then the AT1 and then the Tier 2 and then the rest,” Laboureix said.
Switzerland is not part of the European Union and so does not fall under the region’s banking regulation.
The Single Resolution Board became operational in 2015 in the wake of the Global Financial Crisis and sovereign debt crisis. Its main function is to ensure that there’s the least possible impact on the real economy if a bank fails in the euro zone.
Tougher on Silicon Valley Bank
The recent banking turmoil started in the U.S. with the fall of Silvergate Capital, a bank focused on cryptocurrency. Shortly after, regulators closed Silicon Valley Bank and then Signature Bank following significant deposit outflows in an effort to prevent contagion across the sector.
Since then, First Republic Bank received support from other banks and in Switzerland, authorities asked UBS to rescue Credit Suisse. Late last week, Deutsche Bank shares slid leading some to question if the German bank could be next, although analysts have stressed that its financial position looks strong.
For regulators in the euro zone, the collapse of Silicon Valley Bank, and perhaps subsequent events, could have been avoided if tougher banking rules were in place.
“A bank like this would have been under strict rules,” Laboureix said. “I’m not judging … but what I understand is that these mid-sized banks, so-called mid-sized banks in the U.S., were in reality, big banks compared to ours in the banking union.”
European lawmakers have previously told CNBC that U.S. regulators made mistakes in preventing the failure of SVB and others.
One of the key differences between the U.S. and Europe is that the former has a more relaxed set of capital rules for smaller banks.
Basel III, for instance — a set of reforms that strengthens the supervision and risk management of banks and has been developed since 2008 — applies to most European banks. But American lenders with a balance sheet below $250 billion do not have to follow them.
Despite the recent turbulence, European regulators argue the sector is strong and resilient, particularly because of the level of controls introduced since the Global Financial Crisis.
“If you look at the past events — I mean, Covid, Archegoes, Greensill, the Gilt crisis in the U.K. last September, etc, etc — during the three last years, the resilience of the European banking system was very strong based on very good solvency and very good liquidity and a very good profitability,” Laboureix said.
“I really believe that yes, there is a good resiliency in our banking system. That does not mean that we don’t have to be vigilant.”
— CNBC’s Elliot Smith contributed to this report
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CNBC Daily Open: First Citizens struck a great bargain
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An exterior view of First Citizens Bank headquarters on March 27, 2023 in Raleigh, North Carolina.
Melissa Sue Gerrits | Getty Images News | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
What you need to know today
- As part of the deal, First Citizens will spend just $16.5 billion to buy SVB assets worth $72 billion. Additionally, the Federal Deposit Insurance Corporation will share losses on SVB’s commercial loans and provide a credit line to First Citizens. Investors liked the bargain First Citizens struck — its shares skyrocketed a staggering 53.74% on the news. That’s a jump from $582.55 to $894.61.
- The Dow Jones Industrial Average and S&P 500 rose Monday as regional banks rallied on improved sentiment. First Republic jumped 11.81%, KeyCorp added 5.31% and PacWest increased 3.46%. Likewise, bank stocks in Europe rose 1.4% — Deutsche Bank, in particular, climbed 6.29% — helping the pan-European Stoxx 600 index close 1.1% higher.
- Jack Ma, founder of Alibaba, has been spotted in China after spending months out of the country. Analysts think it’s a sign Beijing’s loosening its grip on the technology sector in its pursuit of economic growth this year.
- PRO Jeremy Siegel, professor at the Wharton School, said the Federal Reserve “basically beat inflation late last year,” citing these indicators.
The bottom line
Investors are heaving a sigh of relief, and it’s all about the banks.
First Citizens’ purchase of SVB’s assets was a bargain in monetary terms. More crucially, it signaled to markets that, despite SVB’s financial difficulties, there was still value in SVB’s reputation and relationship with its clients. There’s hope, then, of reviving a dead bank — something that can happen only in an environment conducive to such miraculous feats.
Another troubled bank, First Republic, rallied after it was reported that U.S. authorities were considering giving the bank more time to shore up its liquidity. It might not need much more time, not only thanks to the $30 billion deposit promised to it by a coalition of banks, but also because the outflow of deposits from smaller banks to larger institutions has slowed in recent days, as sources told CNBC’s Hugh Son.
And beleaguered KeyCorp, which tanked about 60% since the start of the banking turmoil, has a chance of surging 68.6%, according to Citi, which upgraded KeyCorp to buy from neutral.
The optimism was reflected in the SPDR S&P Regional Banking ETF (KRE), which rose about 0.87%. Major indexes — with the exception of the Nasdaq Composite (more on that in a moment) — closed the day in the green too. The Dow increased 0.6% and the S&P inched up 0.2%. The Nasdaq Composite, however, fell 0.5%.
Technology shares, which posted sterling gains as banks struggled the past two weeks, are now facing difficulties of their own. Alphabet slid 2.83%, Apple lost 2.8% and Meta fell 1.5%. Charles Schwab’s Liz Ann Sonders noted the S&P 500 information technology sector’s valuation, relative to the performance of the companies, has risen more than 30%. That’s not a sign we’re back in the pandemic days of sky-high tech valuation, but it’s something to keep an eye on as the banking crisis (hopefully) gets contained.
Subscribe here to get this report sent directly to your inbox each morning before markets open.
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U.S. stocks end mostly higher as banks helped buoy S&P 500 after First Citizens deal
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U.S. stocks closed mostly higher Monday, as bank shares climbed after First Citizens BancShares Inc.
FCNCA,
+53.74%
agreed to buy failed Silicon Valley Bank’s deposits and loans. The Dow Jones Industrial Average
DJIA,
+0.60%
finished 0.6% higher, while the S&P 500
SPX,
+0.16%
gained 0.2% and the technology-heavy Nasdaq Composite
COMP,
-0.47%
slipped 0.5%, according to preliminary data from FactSet. Regional and big banks helped buoy the S&P 500, with First Republic Bank
FRC,
+11.81%
among the index’s top-performing stocks, FactSet data show. Shares of major Wall Street banks such as Bank of America Corp.
BAC,
+4.97% ,
Citigroup Inc.
C,
+3.87% ,
Wells Fargo & Co.
WFC,
+3.42%
and JPMorgan Chase & Co.
JPM,
+2.87%
also saw sharp gains in Monday’s trading session.[ad_2]
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Here’s why the U.S. had to sweeten terms to get the SVB sale done
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The winning bidder in the government’s auction of Silicon Valley Bank’s main assets received several concessions to make the deal happen.
First Citizens BancShares is acquiring $72 billion in SVB assets at a discount of $16.5 billion, or 23%, according to a Sunday release from the Federal Deposit Insurance Corporation.
But even after the deal closes, the FDIC remains on the hook to dispose of the majority of remaining SVB assets, about $90 billion, which are being kept in receivership.
And the FDIC agreed to an eight-year loss-sharing deal on commercial loans First Citizen is taking over, as well as a special credit line for “contingent liquidity purposes,” the North Carolina-based bank said Monday.
All told, the SVB failure will cost the FDIC’s Deposit Insurance Fund about $20 billion, the agency said. That cost will be born by higher fees on American banks that enjoy FDIC protection.
Shares of First Citizens shot up 45% in trading Monday.
The deal terms may be explained by tepid interest in SVB assets, according to Mark Williams, a former Federal Reserve examiner who lectures on finance at Boston University.
The government seized SVB on March 10 and later extended the deadline for its assets. Bidding had come down to First Citizens and Valley National Bancorp, Bloomberg reported last week.
“The deal was getting stale,” Williams said. “I think the FDIC realized that the longer this took, the more they’d have to discount it to entice someone.”
The ongoing sales process for First Republic may have cooled interest in SVB assets, according to a person with knowledge of the process. Some potential acquirers held off on the SVB auction because they hoped to make a bid on First Republic, which they coveted more, this person said.
In the wake of SVB’s collapse, many investors were worried about the risk of further contagion in the financial system, sparking a sell-off of regional bank shares. First Republic was one of the hardest hit.
Meanwhile, many depositors also yanked funds from smaller banks. To offset the outflows, JPMorgan and 10 other banks deposited $30 billion in First Republic, but its stock continued to slide, prompting the bank to consider other strategic alternatives. On Monday, First Republic shares were rallying along with other bank stocks.
In its release, First Citizens said it has closed more FDIC-brokered bank acquisitions than any other lender since 2009. The bank’s holding company has $219 billion in assets and more than 550 branches across 23 states.
The deal is a significant boost to First Citizens’ asset size and deposit base, according to Williams.
“They move into the big leagues with this deal,” he said. “When other banks see fire, they run away. This bank runs towards it.”
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Deposit drain from smaller banks into financial giants like JPMorgan Chase has slowed, sources say
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First Republic Bank headquarters is seen on March 16, 2023 in San Francisco, California, United States.
Tayfun Coskun | Anadolu Agency | Getty Images
The surge of deposits moving from smaller banks to big institutions including JPMorgan Chase and Wells Fargo amid fears over the stability of regional lenders has slowed to a trickle in recent days, CNBC has learned.
Uncertainty caused by the collapse of Silicon Valley Bank earlier this month triggered outflows and plunging share prices at peers including First Republic and PacWest.
The situation, which roiled markets globally and forced U.S. regulators to intervene to protect bank customers, began improving around March 16, according to people with knowledge of inflows at top institutions. That’s when 11 of the biggest American banks banded together to inject $30 billion into First Republic, essentially returning some of the deposits they’d gained recently.
“The people who panicked got out right away,” said the person. “If you haven’t made up your mind by now, you are probably staying where you are.”
The development gives regulators and bankers breathing room to address strains in the U.S. financial system that emerged after the collapse of SVB, the go-to bank for venture capital investors and their companies. Its implosion happened with dizzying speed this month, turbocharged by social media and the ease of online banking, in an event that’s likely to impact the financial world for years to come.
Within days of its March 10 seizure, another specialty lender Signature Bank was shuttered, and regulators tapped emergency powers to backstop all customers of the two banks. Ripples from this event reached around the world, and a week later Swiss regulators forced a long-rumored merger between UBS and Credit Suisse to help shore up confidence in European banks.
Wearing many hats
The dynamic has put big banks like JPMorgan and Goldman Sachs in the awkward position of playing multiple roles simultaneously in this crisis. Big banks are advising smaller ones while participating in steps to renew confidence in the system and prop up ailing lenders like First Republic, all while gaining billions of dollars in deposits and being in the position of potentially bidding on assets as they come up for sale.
The broad sweep of those money flows are apparent in Federal Reserve data released Friday, a delayed snapshot of deposits as of March 15. While large banks appeared to gain deposits at the expense of smaller ones, the filings don’t capture outflows from SVB because it was in the same big-bank category as the companies that gained its dollars.
Although inflows into one top institution have slowed to a “trickle,” the situation is fluid and could change if concerns about other banks arise, said one person, who declined to be identified speaking before the release of financial figures next month. JPMorgan will kick off bank earnings season on April 14.
At another large lender, this one based on the West Coast, inflows only slowed in recent days, according to another person with knowledge of the matter.
JPMorgan, Bank of America, Citigroup and Wells Fargo representatives declined to comment for this article.
Post-SVB playbook
The moves mirror what one newer player has seen as well, according to Brex co-founder Henrique Dubugras. His startup, which caters to other VC-backed growth companies, has seen a surge of new deposits and accounts after the SVB collapse.
“Things have calmed down for sure,” Dubugras told CNBC in a phone interview. “There’s been a lot of ins and outs, but people are still putting money into the big banks.”
The post-SVB playbook, he said, is for startups to keep three to six months of cash at regional banks or new entrants like Brex, while parking the rest at one of the four biggest players. That approach combines the service and features of smaller lenders with the perceived safety of too-big-to-fail banks for the bulk of their money, he said.
“A lot of founders opened an account at a Big Four bank, moved a lot of money there, and now they’re remembering why they didn’t do that in the first place,” he said. The biggest banks haven’t historically catered to risky startups, which was the domain of specialty lenders like SVB.
Dubugras said that JPMorgan, the biggest U.S. bank by assets, was the largest single gainer of deposits among lenders this month, in part because VCs have flocked to the bank. That belief has been supported by anecdotal reports.
The next domino?
For now, attention has turned to First Republic, which has teetered in recent weeks and whose shares have lost 90% this month. The bank is known for its success in catering to wealthy customers on the East and West coasts.
Regulators and banks have already put together a remarkable series of measures to try to save the bank, mostly as a kind of firewall against another round of panic that would swallow more lenders and strain the financial system. Behind the scenes, regulators believe the deposit situation at First Republic has stabilized, Bloomberg reported Saturday.
First Republic has hired JPMorgan and Lazard as advisors to come up with a solution, which could involve finding more capital to remain independent or a sale to a more stable bank, said people with knowledge of the matter.
If those fail, there is the risk that regulators would have to seize the bank, similar to what happened to SVB and Signature, they said. A First Republic spokesman declined comment.
While the deposit flight from smaller banks has slowed, the past few weeks have exposed a glaring weakness in how some have managed their balance sheets. These companies were caught flat-footed as the Fed engaged in its most aggressive rate hiking campaign in decades, leaving them with unrealized losses on bond holdings. Bond prices fall as interest rates rise.
It’s likely other institutions will face upheaval in the coming weeks, Citigroup CEO Jane Fraser said during an interview on Wednesday.
“There could well be some smaller institutions that have similar issues in terms of their being caught without managing balance sheets as ably as others,” Fraser said. “We certainly hope there will be fewer rather than more.”
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U.S. stocks end higher, S&P 500 books back-to-back weekly gains despite bank jitters spurred by Deutsche Bank
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U.S. stocks finished Friday higher, despite a jump in the cost of Deutsche Bank’s credit-default swaps helping to reignite banking-sector worries. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite each booked weekly gains.
How stocks traded
-
The Dow Jones Industrial Average
DJIA,
+0.41%
rose 132.28 points, or 0.4%, to close at 32,237.53. -
The S&P 500
SPX,
+0.56%
gained 22.27 points, or 0.6%, to finish at 3,970.99. -
The Nasdaq Composite
COMP,
+0.31%
added 36.56 points, or 0.3%, to end at 11,823.96.
For the week, the Dow gained 1.2%, while the S&P 500 rose 1.4% and the Nasdaq advanced 1.7%, according to FactSet data. The Dow snapped two straight weeks of losses, while the S&P 500 and Nasdaq each booked back-to-back weekly gains.
What drove markets
U.S. stocks ended modestly higher Friday to notch weekly gains even as worries over the banking system lingered.
Bank concerns have cast a “heavy cloud over the market,” with investors worried about “weak links,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, in a phone interview Friday. Ma said he expects investors will be looking to sell, potentially into any rallies, “until some of these clouds are lifted.”
Shares of Germany’s Deutsche Bank AG
DBK,
-8.53% DB,
-3.11%
dropped Friday, after the cost of insuring the bank against a credit default jumped. The bank’s credit-default swaps had risen to the highest level since late 2018, according to a Reuters report Friday.Treasury Secretary Janet Yellen announced Friday she called an unscheduled meeting of the Financial Stability Oversight Council or FSOC which was created in the wake of the 2008 financial crisis to help the government combat threats to financial stability. The FSOC issued a short statement after the market closed Friday saying that “while some institutions have come under stress, the U.S. banking system remains sound and resilient”.
“Clearly, somebody thinks there are some concerns there,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. The problems facing European banks stem back to the era of negative interest rates, which set banks up for large losses on their bond holdings, he said.
The selloff in Deutsche Bank shares weighed on banks in the U.S. and Europe, as banking-sector fears reemerged. Shares of UBS Group
UBS,
-0.94% ,
which recently agreed to buy rival Credit Suisse Group, fell Friday.Other major European lenders, including Italy’s UniCredit S.p.A
UCG,
-4.06%
and Spain’s Banco Santander SA
SAN,
-3.00% ,
also saw their shares sink.“The thing that’s important to know about financials is there probably are banks that have problems, but there are others that don’t,” Frederick told MarketWatch during a phone interview. “People need to do some research.”
The S&P 500’s financial sector fell 0.1% Friday, according to FactSet data.
While banking-sector woes have hammered the financial sector this month, the outperformance of megacap technology stocks and other sectors have helped prop up the broader U.S. equities market. So far this month, the S&P 500 index is up less than 0.1%, FactSet data show.
Concerns about the fragility of the banking sector have been percolating following a year of the Federal Reserve’s aggressive interest rate hikes. On Wednesday, the Fed announced that it hiked its policy rate by a quarter point to a range of 4.75% to 5% while projecting it could deliver one more 25 basis-point hike in 2023.
In his first comments since the rapid collapse of Silicon Valley Bank two weeks ago, St. Louis Federal Reserve President James Bullard said Friday the latest drop in Treasury yields could help cushion some of the stress facing the banking sector.
Yields on the 2-year Treasury note
TMUBMUSD02Y,
3.779%
and 10-year Treasury note
TMUBMUSD10Y,
3.376%
each fell Friday in their third straight week of declines, according to Dow Jones Market Data. Two-year yields slid to 3.777% on Friday, the lowest level since September based on 3 p.m. Eastern time levels, while 10-year Treasury yields dropped to 3.379%, their lowest rate since January.Read: ‘Red alert recession signals.’ Gundlach expects the Fed to cut rates substantially ‘soon.’
In U.S. economic data, a report Friday on sales of durable goods showed orders fell 1% in February, largely because of waning demand for passenger planes and new cars. Meanwhile, the S&P Global Flash U.S. services-sector index rose to an 11-month high of 53.8 in March.
The role of regional banks in the U.S. economy is “huge,” said Sandi Bragar, chief client officer at wealth management firm Aspiriant, in a phone interview Friday. Bragar said she worries that recent regional bank failures will result in a pullback in lending that leads to slower economic growth and potentially a recession.
“Our stance has been to be very diversified and we have been remaining on the defensive side of things,” she said.
Within equities, that has meant holding “high-quality companies” that should be resilient in “poor economic times,” including stocks in areas such as healthcare, information technology and consumer staples, said Bragar.
Companies in focus
-
Deutsche Bank
DBK,
-8.53% DB,
-3.11%
shares dropped 8.5% but finished off lows seen when the German bank’s credit default swaps jumped without an apparent catalyst. -
Wells Fargo
WFC,
-1.04%
shares slid 1% while JPMorgan
JPM,
-1.52%
fell 1.5%, with bank stocks remaining under pressure in the wake of regional U.S. bank failures. -
Activision Blizzard
ATVI,
+5.91%
climbed 5.9% and after the U.K. Competition and Markets Authority dropped some of its concerns with the potential purchase of the company by Microsoft. Shares of Microsoft
MSFT,
+1.05%
rose slightly more than 1%.
–Steve Goldstein contributed to this report.
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The Dow Jones Industrial Average
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Financial conditions are tightening after SVB’s collapse and could slow the economy, Powell says
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Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, DC, on March 22, 2023.
Olivier Douliery | AFP | Getty Images
Federal Reserve Chair Jerome Powell said Wednesday that the U.S. banking sector is strong but that the recent failure of some regional banks could cause ripple effects that slow down the economy.
At a press conference after the latest Federal Open Markets Committee meeting, Powell described the banking system as “sound and resilient” but said the central bank was monitoring a change in the availability of credit for consumers and businesses.
“Financial conditions seem to have tightened, and probably by more than the traditional indexes say. … The question for us though is how significant will that be — what will be the extent of it, and what will be the duration of it,” Powell said.
“We’ll be looking to see how serious is this and does it look like it’s going to be sustained. And if it is, it could easily have a significant macroeconomic effect, and we would factor that into our policy decisions,” he added.
The Fed hiked its benchmark interest rate by a quarter of a percentage point on Wednesday, but its projections called for just one more hike over the rest of the year. The central bank chief said that tighter financial conditions caused by more stringent lending decisions from banks could have a similar impact as further hikes from the Fed.
Powell’s comments come after regional banks have come under significant pressure this month. Silicon Valley Bank collapsed, making it the second largest failure in U.S. history, in part because the rapid rise in interest rates devalued its bond portfolio and created large paper losses for the bank.
SVB’s management “failed badly” in managing its interest rate risks, while other banks have managed to handle the hikes, Powell said.
Other banks including First Republic and PacWest have seen significant outflows of deposits. The Fed set up a new Bank Term Funding Program to help banks access cash, but the stocks for regional banks have fallen in volatile trading since the facility was created on March 12.
Powell said that deposit flows have stabilized over the past week and that Americans should feel confident that their money is safe, though he stopped short of explicitly saying that all deposits are now guaranteed.
“What I’m saying is you’ve seen that we have the tools to protect depositors when there is a threat of serious harm to the economy or to the financial system, and we’re prepared to use those tools. I think depositors should assume that their deposits are safe,” he said.
The collapse of Silicon Valley Bank has led to more scrutiny on the Federal Reserve’s supervisory role over banks, especially from Sen. Elizabeth Warren (D-MA).
The Fed is conducting an internal review of potential regulatory issues around SVB, led by Vice Chair for Supervision Michael Barr, and Powell said he expects investigations from outside the central bank as well.
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Fed hikes rates by a quarter percentage point, indicates increases are near an end
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WASHINGTON — The Federal Reserve on Wednesday enacted a quarter percentage point interest rate increase, expressing caution about the recent banking crisis and indicating that hikes are nearing an end.
Along with its ninth hike since March 2022, the rate-setting Federal Open Market Committee noted that future increases are not assured and will depend largely on incoming data.
“The Committee will closely monitor incoming information and assess the implications for monetary policy,” the FOMC’s post-meeting statement said. “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
That wording is a departure from previous statements which indicated “ongoing increases” would be appropriate to bring down inflation. Stocks fell during Fed Chair Jerome Powell’s news conference. Some took Powell’s comments to mean that the central bank may be nearing the end of its rate hiking cycle, though he qualified that to say that the inflation fight isn’t over.
“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” the central bank leader said at his post-meeting news conference.
However, Powell acknowledged that the events in the banking system were likely to result in tighter credit conditions.
The softening tone in the central bank’s prepared statement came amid a banking crisis that has raised concerns about the system’s stability. The statement noted the likely impact from recent events.
“The U.S. banking system is sound and resilient,” the committee said. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”
During the press conference, Powell said the FOMC considered a pause in rate hikes in light of the banking crisis, but ultimately unanimously approved the decision to raise rates due to intermediate data on inflation and the strength of the labor market.
“We are committed to restoring price stability and all of the evidence says that the public has confidence that we will do so, that will bring inflation down to 2% over time. It is important that we sustain that confidence with our actions, as well as our words,” Powell said.
The increase takes the benchmark federal funds rate to a target range between 4.75%-5%. The rate sets what banks charge each other for overnight lending but feeds through to a multitude of consumer debt like mortgages, auto loans and credit cards.
Projections released along with the rate decision point to a peak rate of 5.1%, unchanged from the last estimate in December and indicative that a majority of officials expect only one more rate hike ahead.
Data released along with the statement shows that seven of the 18 Fed officials who submitted estimates for the “dot plot” see rates going higher than the 5.1% “terminal rate.”
The next two years’ worth of projections also showed considerable disagreement among members, reflected in a wide dispersion among the “dots.” Still, the median of the estimates points to a 0.8 percentage point reduction in rates in 2024 and 1.2 percentage points worth of cuts in 2025.
The statement eliminated all references to the impact of Russia’s invasion of Ukraine.
Markets had been closely watching the decision, which came with a higher degree of uncertainty than is typical for Fed moves.
Jerome Powell, chairman of the US Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, DC, on Wednesday, March 22, 2023.
Al Drago | Bloomberg | Getty Images
Earlier this month, Powell had indicated that the central bank may have to take a more aggressive path to tame inflation. But a fast-moving banking crisis thwarted any notion of a more hawkish move – and contributed to a general market sentiment that the Fed will be cutting rates before the year comes to a close.
Estimates released Wednesday of where Federal Open Market Committee members see rates, inflation, unemployment and gross domestic product underscored the uncertainty for the policy path.
Officials also tweaked their economic projections. They slightly increased their expectations for inflation, with a 3.3% rate pegged for this year, compared to 3.1% in December. Unemployment was lowered a notch to 4.5%, while the outlook for GDP nudged down to 0.4%.
The estimates for the next two years were little changed, except the GDP projection in 2024 came down to 1.2% from 1.6% in December.
The forecasts come amid a volatile backdrop.
Despite the banking turmoil and volatile expectations around monetary policy, markets have held their ground. The Dow Jones Industrial Average is up some 2% over the past week, though the 10-year Treasury yield has risen about 20 basis points, or 0.2 percentage points, during the same period.
While late-2022 data had pointed to some softening in inflation, recent reports have been less encouraging.
The personal consumption expenditures price index, a favorite inflation gauge for the Fed, rose 0.6% in January and was up 5.4% from a year ago – 4.7% when stripping out food and energy. That’s well above the central bank’s 2% target, and the data prompted Powell on March 7 to warn that interest rates likely would rise more than expected.
But the banking issues have complicated the decision-making calculus as the Fed’s pace of tightening has contributed to liquidity problems.
Closures of Silicon Valley Bank and Signature Bank, and capital issues at Credit Suisse and First Republic, have raised concerns about the state of the industry.
While big banks are considered well-capitalized, smaller institutions have faced liquidity crunches due to the rapidly rising interest rates that have made otherwise safe long-term investments lose value. Silicon Valley, for instance, had to sell bonds at a loss, triggering a crisis of confidence.
The Fed and other regulators stepped in with emergency measures that seem to have stemmed immediate funding concerns, but worries linger over how deep the damage is among regional banks.
At the same, recession concerns persist as the rate increases work their way through the economic plumbing.
An indicator that the New York Fed produces using the spread between 3-month and 10-year Treasurys put the chance of a contraction in the next 12 months at about 55% as of the end of February. The yield curve inversion has increased since then.
However, the Atlanta Fed’s GDP tracker puts first-quarter growth at 3.2%. Consumers continue to spend – though credit card usage is on the rise – and unemployment was at 3.6% while payroll growth has been brisk.
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How First Republic stock’s tailspin started and why it hasn’t stopped
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Shortly after Silicon Valley Bank disclosed on March 8 that it was running short of cash and needed to raise capital, First Republic Bank’s epic stock slide began.
The stock
FRC,
-15.47%
has lost 90% of its value in less than two weeks, hitting an all-time low of $12.18 a share on Monday.Supportive comments from Treasury Secretary Janet Yellen helped it snap back on Tuesday, but it’s hovering between positive and negative territory on Wednesday as investors await a key Federal Reserve decision on interest rates.
First Republic finds itself in a tough spot with a low share price and fresh debt downgrades and not even efforts to inject $30 billion into the company’s deposits in a scheme backed by JPMorgan Chase & Co.
JPM,
-2.58%
and a backstop from the U.S. Federal Reserve seem to be helping.The bank’s troubles stem from its overlap both in clientele and parts of its balance sheet with doomed Silicon Valley Bank, which is being sold off this week by the Federal Deposit Insurance Corp. after it officially failed on Friday, March 10. Silicon Valley Bank suffered a classic run on a bank, when depositors, nervous that it needed to raise capital, yanked their deposits.
First Republic has suffered the same deposit flight.
As a San Francisco bank with a focus on serving high-end clients, First Republic has acted as wealth manager for the greater Silicon Valley region of executives, managing directors and startup CEOs, as well as their counterparts on the East Coast.
The list incudes Facebook
META,
-1.16%
Founder Mark Zuckerberg, who has a large mortgage courtesy of First Republic, as the Wall Street Journal has reported. Few of its loans ever sour — it had $213 billion in assets at the end of 2022 and $176 billion in deposits.With its sophisticated lending products and access to the technology startup world, Silicon Valley Bank was also known for its a customer base from the venture capital and private equity world.
Also Read: 24 bank stocks that contrarian bottom-feeders can feast on now
Those well-heeled clients of both banks started running into problems as interest rates rose last year, pundits warned of an economic slowdown and investors switched to a risk-off strategy of conserving cash and containing costs.
The collapse of FTX and strain in the crypto world also fed the need for cold, hard government-backed currency. Rising interest rates made it more expensive to borrow and put a chill on the deal-making environment.
All of this and other factors led to a drain on deposits at Silicon Valley Bank and others as it faced “elevated client cash burn” at a rate that was double pre-2021 levels, even as venture capital and private equity funds were slowing down their capital raising activities, the company said in an ill-fated mid-quarter report.
On March 8 after the market close, Silicon Valley Bank said it planned to sell $2.25 billion in common stock and a type of preferred stock, with one of its major clients, private equity firm General Atlantic, in line to buy $500 million worth. Goldman Sachs Group Inc.
GS,
-1.14%
was handling the deal.The company also disclosed that it had lost $1.8 billion on the sale of $21 billion in available-for-sale securities on its balance sheet to cover deposit withdrawals.
It was this last part that caused big trouble for First Republic. Not only did its clientele overlap with Silicon Valley Bank, its holdings included some of the same securities that Silicon Valley Bank sold at a loss.
Wall Street investors quickly started bidding down shares of First Republic and other regional banks and the credit rating agencies moved in, cutting the bank’s rating from investment grade deep into junk in just a few days.
None of this helped First Republic hold on to its deposits.
As one longtime banking official said recently, money from Silicon Valley types typically comes in the form of uninsured deposits, which means they’re in excess of the $250,000 that the FDIC will guarantee if a bank goes out of business. This so called hot-money is great for banks when times are good, but can move away quickly if the environment changes.
“When hot money gets nervous, it runs,” former FDIC chairman Bill Isaac told MarketWatch recently.
While an unprecedented effort on March 16 by 11 banks to inject $30 billion into First Republic’s deposits temporarily provided a lift to its stock, the move apparently wasn’t enough.
First Republic said last Thursday that it had borrowed between $20 billion and $109 billion from the Federal Reserve during that week. It also increased short-term borrowing from the Federal Home Loan Bank by $10 billion at a rate of 5.09%.
Jefferies analyst Ken Usdin said the numbers revealed that First Republic’s total deposits had dropped by up to $89 billion in the week ended March 17 past week—or about three times more than the $30 billion injection from the bank.
“With [First Republic’s] earnings profile clearly impaired, the new deposits effectively bridge the estimated $30.5 billion of uninsured deposits still on [the bank’s] balance sheet, providing time for [it] to likely explore a sale,” Usdin said.
Janney Montgomery Scott analyst Tim Coffey said First Republic’s stock drop in recent days reflects uncertainty around what a potential second bailout would look like, or how the bank’s balance sheet is faring after a steep run in deposits and the falling value of its long-dated securities.
Another unknown is the company’s latest Tier 1 capital Ratio, a key measure of a bank’s balance sheet strength.
Like Silicon Valley Bank, First Republic’s balance sheet has had more than the usual exposure to long-dated securities, which have been falling in value as interest rates rise.
A typical mix for a bank of comparable size is to hold about 72% of securities as available for sale. The remaining 28% are held to maturity. First Republic’s mix is reversed with 12% available for sale and 88% held to maturity.
The bank’s mix of longer-dated assets now commands a lower market value, given where interest rates are. The bank’s emphasis on long-dated securities provided a better return when interest rates were near zero, but they have been a liability in the current environment.
“They’ve had duration risk where the value of their securities started going down as interest rates rose,” Coffey told MarketWatch.
Another problem for First Republic is that many of those long-dated securities are in the mortgage business, which has been ailing as interest rates rise.
Plenty of questions remain about First Republic’s situation and whether it could have been avoided. The challenges facing First Republic as well as the demise of Silicon Valley Bank and Signature Bank will be the focus of hearings on Capitol Hill next week.
Wall Street is also awaiting comments from the U.S. Federal Reserve when it updates its interest rate policy later on Wednesday.
And JPMorgan Chase continues to work with First Republic on a potential bailout, even as the bank has reportedly hired Lazard
LAZ,
-2.17%
to weigh strategic alternatives.All of these factors add to the uncertainty swirling around First Republic, giving investors little reason to go long on the stock for now.
Also Read: 24 bank stocks that contrarian bottom-feeders can feast on now
Related: Senate Banking Chair Sherrod Brown sees bipartisan support for changes to deposit insurance
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CNBC Daily Open: Janet Yellen’s guarantee to banks comes with a catch
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U.S. Treasury Janet Yellen speaks at the American Bankers Association Washington Summit on March 21, 2023 in Washington, DC.
Drew Angerer | Getty Images News | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Regional banks popped – but quickly lost ground in after-hours trading, in a sign of continued fragility.
What you need to know today
- Investors took faith in the possibility of a government backstop – or at least they did during regular trading hours. First Republic popped 30% after Yellen’s speech. PacWest Bancorp jumped 18.77% and Keycorp rose 9.34%. But all three retraced gains after the bell, especially First Republic, which was last down 9%.
- Gold prices — which now stand at $1,941.6 per ounce — could breach their all-time high of $2,075 in the coming weeks, analysts forecast. One analyst thinks gold could go as high as $2,600. Traders have been flocking to gold as a safe asset amid the banking chaos.
- PRO Morgan Stanley is now “outright bullish” on stocks in Asia and emerging markets. The bank thinks Hong Kong’s Hang Seng index could jump up to 28% from current levels by the end of this year.
The bottom line
In a sign of how fragile the banking system still is, U.S. regional banks rebounded sharply at the mere prospect of a government guarantee, then pared some of those gains after regular hours.
Note that Yellen didn’t say the government would unequivocally help all small banks. These are her exact words, with emphasis added by me: “Similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.” In other words, her statement had two important qualifications banks need to meet before the government would even consider stepping in: first, the bank must suffer a run; second, it must be important enough that its collapse would affect the rest of the banking sector.
Essentially, that’s not so different from what Yellen said last Thursday — that the government would swoop in if “failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.” But investor confidence is currently so low that any reassuring comment, vague as it might sound, will sound like a promise.
Not that reassuring comments are necessarily bad. Indeed, Yellen’s remarks on Tuesday were good for markets. The Dow Jones Industrial Average rose 0.98%. The S&P 500 added 1.30% and hit 4,002.87, its first time since March 6 that it’s ended the day above 4,000 since March 6. The Nasdaq Composite jumped 1.58%.
Tomorrow, we’ll hear from the Federal Reserve and find out whether it’s hiking interest rates even amid the turmoil in banks. Markets are pricing in an 86% chance of a quarter-point increase — though that number is mostly conjecture, since the Fed has been unusually — though understandably — quiet about its intentions.
Paradoxically, analysts think the Fed should hike rates not just because inflation remains uncomfortably high, but also because it would signal confidence the Fed can “walk and chew gum at the same time,” said Michael Gapen, chief U.S. economist at Bank of America. Indeed, a pause might have the opposite effect of spreading fear — “that would be the same as acknowledging that [Fed officials] know something that maybe the markets don’t know,” which would be “devastating” for markets, said Johan Grahn, head of ETF strategy at Allianz Investment Management.
And even though markets looked surprisingly resilient even amid two weeks of bank trauma, it’s not clear how much more devastation markets can absorb — nor does anyone wish to find out.
Subscribe here to get this report sent directly to your inbox each morning before markets open.
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