The legendary investor indicates that more than 60% of the deposits of Comerica and US Bancorp are not insured.
The last 24 hours have been a little quieter, but the confidence crisis continues to rock banks.p
Investors are trying to catch their breath as they await the Federal Reserve’s monetary policy decision.
The Fed faces its toughest choice since it began raising interest rates in the second half of 2021 to combat rising prices, currently at all-time highs.
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But what complicates the equation now is the outbreak of a banking crisis on March 10 caused by the sudden collapse of Silicon Valley Bank.
The irony is that SVB failed because the bank failed to hedge against the risk of a change in market conditions related to rising interest rates. SVB had bought Treasury bonds when interest rates were low.
These assets are among the highest quality because the risk of the borrower, the US government, defaulting is almost non-existent.
The problem is that the bank had not anticipated that interest rates would rise. When the Fed began raising rates to combat inflation, the bank’s bond portfolio lost value. Bond prices and interest rates move inversely with each other.
The fall in prices caused the bank a loss of $1.8 billion when it sold some of them to meet customer withdrawal requests. Those clients had suddenly found it difficult to borrow because borrowing had become expensive when interest rates rose.
Comerica and US Bancorp: Burry’s Approach
BLS (BLIMS) – Get a free reportthen he wanted to raise $2.25 billion in capital. This announcement sparked a run on the bank, forcing regulators to shut down the company on March 10. Since then, investors and depositors have feared that SVB’s problems would spread to other regional banks with similar profiles. (The industry term is “contagion”.)
The emergency measures that regulators have announced so far have failed to restore calm.
It is against this backdrop that the Fed will announce on March 22 its choice between fighting inflation by further raising interest rates and allaying fears of a conflagration in the financial system.
Economists and analysts are divided.
“Don’t just do something: sit there,” said Nobel Prize winner in economics Paul Krugman. “The banking mess is, from what I understand, reason enough for the Fed to pause until we know more.”
Larry Summers, Harvard’s star professor, says the Fed should raise rates despite problems within the banks.
“I think it’s appropriate, at least under the current facts, to raise interest rates by 25 basis points,” Summers said (0.25 percentage point).
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If in recent days, observers had focused on First Republic Bank (FRC) – Get a free reportprominent investor Michael Burry is sounding the red flag on two other banks: Comerica (CMA) – Get a free reportand US Bancorp.
In one chart, the legendary investor names what he considers the banks most vulnerable to a bank run. They are also among the firms with the most unrealized losses on their Treasury and municipal bond portfolios.
From the chart/guide, as Burry called it, it appears that Silicon Valley Bank and Signature Bank in New York, two banks shut down by regulators, were the institutions with the most uninsured deposits. That means customers who have more than the $250,000 FDIC insurance limit on their accounts.
First Republic is the third bank most dependent on wealthy clients. Then come Comerica and US Bancorp; more than 60% of its depositors are uninsured, according to Burry.
The investor is nicknamed ‘Big Short’ by Wall Street because he became a legend after he successfully bet against the subprime mortgages that caused the 2008 financial crisis.
Moody’s Warns About Comerica; US Bancorp weighs in
At the same time, Comerica’s unrealized losses represent 40% of its Common Equity Tier 1 capital, which is a bank’s highest quality capital because it is fully available to cover losses.
This percentage is even higher at US Bancorp: unrealized losses account for nearly 60% of this Tier 1 capital. Unrealized losses account for 40% of First Republic Bank’s Tier 1 capital, but about 80% of Bank customers are not insured.
For comparison, unrealized losses constituted 30-40% of Common Equity Tier 1 capital for Signature Bank and 120% for SVB.
“This is a good chart/guide,” Burry posted on Twitter on March 17.
Three days later he added: “I hope the chart helped.”
As usual with Burry, the tweets have been deleted.
The hedge fund manager seems to suggest that First Republic Bank, Comerica and US Bancorp are vulnerable to bank runs and that USB has the most unrealized losses relative to its capital.
US Bancorp indicated in its annual regulatory filing, SEC Form 10-K, that 55% of deposits were uninsured as of December 31, 2022. This is 5 percentage points less than Burry’s data.
“US Bank maintains strong capital and liquidity positions, along with a disciplined asset and liability management framework, to ensure strong balance sheet actions,” the Minneapolis-based bank said. saying.
The bank also indicated that it also recorded entries last week, unlike other regional banks, which are instead seeing customers withdraw their money.
“Our deposit flows are not only stable, but we are adding new accounts and new clients every day,” a company spokesperson said in an emailed statement on March 22.
Comerica said that “any correlation between Comerica and recently affected banks, especially as it relates to deposits, is an apples to oranges comparison.”
The bank added that it “has a more diverse, stable and ‘fixed’ deposit base and we remain well capitalized and highly liquid. In short, business as usual at Comerica as we continue to focus on caring for our customers and satisfying their needs”. financial needs”.
Burry’s warning is echoed by credit rating agency Moody’s, which warned on March 14 that it was considering downgrading Comerica’s rating.
“Today’s rating action reflects Comerica’s heavy reliance on more confidence-sensitive uninsured deposit funding, its large number of unrealized losses on its portfolio of available-for-sale securities, as well as a relatively lower capitalization,” Moody’s said.
“Comerica’s share of deposits above the Federal Deposit Insurance Corporation’s insurance threshold is significant, making the bank’s funding profile more sensitive to large and rapid depositor withdrawals.” .
The credit rater continued: “If faced with larger-than-anticipated deposit outflows, the bank may need to sell assets, thereby crystallizing unrealized losses on its AFS securities, which as of December 31, 2022 represented a sizeable 38.5% of its common equity”. Tier 1 capital stock.
US Bancorp was supported by Baird analysts, who called the bank a “high-quality regional bank with little to no downside and ~50% upside over time.”
“Overall, we are constructive on the Union Bank transaction and believe that USB and other superregionals are likely to be net beneficiaries from a deposit funding perspective to the extent that larger depositors want to mitigate their funding risk in the smaller regions,” Baird said.
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