Analysts raise one main concern with regional bank stocks: Deposit flight

Published Mon, Mar 13 202310:25 AM EDTUpdated Mon, Mar 13 202312:31 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The fallout from the collapse of Silicon Valley Bank last week has bankers and investors worried that one of the basic building blocks of the industry — deposits — might be sprinting out the door. Typically, deposit accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation, created during the Great Depression, which protects most individuals but leaves companies and wealthier people with larger accounts not fully insured. The events of the past few days have shown that regional banks with large amounts of uninsured deposits, such as SVB, and New York's Signature Bank, which was closed Sunday, are at risk of deposit flight. "The question is, for depositors with balances over $250K, how comfortable are they with their bank and do they attempt to diversify," said Citi analyst Keith Horowitz. "We believe regionals with less diversified and large uninsured deposit bases are at risk of deposit flight but not at the speed of SVB and they should have time to tap wholesale funding markets (such as FHLB) and raise cash levels," he added, referring to the Federal Home Loan Bank system. KRE 5D mountain Regional bank stocks were under pressure again on Monday after sliding last week. Investors will be looking closely at how concentrated deposits are for these banks. In the case of SVB, the bank had mostly large deposits from companies and wealthy individuals. That can make a bank run worse because smaller retail deposits are seen as more "sticky" than big uninsured accounts. "Unfortunately, one of the first consequences of SIVB's collapse is probably that it will cause a flight of uninsured deposits from smaller, less diverse banks to larger, more diverse ones. That said, just about all banks are likely to want to increase their retail funding," Oppenheimer analyst Chris Kotowski said in a note to clients. Under normal conditions, banks would be forced to sell securities to raise the cash to meet large withdrawals. And interest rates have risen sharply over the past year, meaning that even safe assets held by a bank but at lower interest rates than currently prevail will be subject to losses when they are sold. That is how SVB booked a $1.8 billion loss last week, which helped spark the bank run. This is where the new Bank Term Funding Program from the Federal Reserve comes in. The facility, which is backed by $25 billion from the Treasury Department, will offer loans of up to one year on high-quality assets. Those loans will be valued at the par value of the assets, not market value, allowing banks to raise cash without booking losses. But even with that support, customers could still be spooked and pull their money out. "It sends a signal, provides liquidity, but will uninsured, large depositors at small regional banks remain due to the announcement of SIVB and SBNY, or was the angst over the last 48 hours enough that money would move to the larger regional and GSIBs?" JPMorgan analyst Kabir Caprihan wrote in a note to clients, referring to global systemically important banks . "We expect continued deposit flow out of the regionals, but the key will be the pace." Even if the facility is successful in stemming bank runs, it could lead to higher costs and lower profits for years to come, according to Bank of America analyst Ebrahim Poonawala, who cut his price targets for more than 20 banks Monday. "We believe that regional banks are likely to experience higher funding costs (as the industry gets more aggressive on deposit retention) and potentially higher operating costs (greater compliance burden) as regulators likely reevaluate the existing capital/liquidity risk framework," Poonawala said in a note to clients. — CNBC's Michael Bloom contributed to this report.