by Bryan Perry

April 18, 2023

Opinions about how the first-quarter earnings season will play out are very mixed. There are those who believe the market’s resiliency is about to get a major wake-up call, where profits and guidance will sorely disappoint, and there are just as many who believe that companies will deliver top- and bottom-line results that surprise to the upside, despite some recent softer data on retail sales and manufacturing.

The parade of Q1 earnings officially kicked off last Friday, and it looked like a very good start to the reporting season. Major money center banks, led by JPMorgan Chase & Co. (JPM), did not disappoint, enjoying huge deposit inflows from the regional banks. “The Empire strikes back,” quipped Jason Goldberg, a senior research analyst at Barclays. As depositors and other market participants responded to regional bank uncertainty in recent weeks, he added, “There’s been a flight to bigness,” and Chase is BIG.

Although big banks posted record revenues, they issued a cautious note about recent stress in the financial sector and the negative impact it could have on future lending. Considering their guarded outlook, JPM rallied with a few of the biggest banks showing bullish price action, which probably came as a surprise to many market participants. The real test will come when the regional banks report what’s really happening “under the hood” in the specifics of Held to Maturity (HTM) versus Available for Sale (AFS) securities.

More banks and brokerages are shifting AFS assets to the HTM side of their balance sheets, as HTM securities are not “marked to market,” but this accounting maneuver, which looks better when earnings are released, doesn’t fix the underlying problem if there is a bank run. Even with the Treasury and the Fed creating a $2 trillion Bank Term Funding Program (BTFP), following the collapse of SVB, that virtually guarantees 100% of deposits above $250k, it has done little to bring buyers back to regional bank stocks.

Contrary to a couple of money center banks, price action in regional banks is downright disturbing, as they retreated back to levels not seen since the outbreak of Covid-19. More disturbing, one would have thought that end-of-quarter window dressing in late March would have seen most fund managers erasing their exposure to this troubled sector. But heading into the third week of April, average daily volume is still brisk, as seen by this chart of the S&P Regional Banking ETF SPDR (KRE), implying little if any support, even with some Wall Street upgrades on the basis of babies getting thrown out with bathwater.

Standard and Poor's 500 Regional Banking Exchange Traded Fund Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

When paper losses-per-share of current stock prices are carved out and brought to light, it is no wonder the price action is so bearish. While many factors impact the valuation of a bank stock, here is a list of banks with their unrealized loss per share compared to their stock price as of March 12  (from “A List of Some Banks And Their Shocking Paper Losses on Debt Securities Holdings,” Seeking Alpha, March 12, 2023) that gives some hard insight as to the extent of the problem banks are facing, and the impending risks if bond yields start climbing again.

Citigroup (C) loss per share ($16.02), 33% of stock price
AFS     $256,608 million cost – $249,679 million fair value = $5,929 million loss
HTM   $268,863 million cost – $243,648 million fair value = $25,215 million loss
*Total loss $31,144 million
(AFS = Available for Sale accounting; HTM = Held to Maturity (HTM) accounting)

JPMorgan Chase (JPM) loss per share ($16.00), 12% of stock price
AFS     $216,217 million cost – $205,857 million fair value = $10,360 million loss
HTM   $425,372 million cost – $388,648 million fair value = $36,724 million loss
*Total loss $47,084 million

Signature Bank (SBNY) loss per share ($51.44), 73% of stock price
AFS     $21,071 million cost – $18,594 million fair value = $2,477 million loss
HTM   $7,780 million cost – $7,018 million fair value = $762 million loss
*Total loss $3,239 million

U.S. Bancorp (USB) loss per share ($12.68), 31% of stock price
AFS     $81,450 million cost – $72,910 million fair value = $8,540 million loss
HTM   $88,740 million cost – $77,874 million fair value = $10,866 million loss
*Total loss $19,406 million

First Republic Bank (FRC) loss per share ($28.15), 34% of stock price
AFS     $3,817 million cost – $3,347 million fair value = $470 million loss
HTM   $28,359 million cost – $23,587 million fair value = $4,772 million loss
*Total loss $5,242 million

Wells Fargo (WFC) loss per share ($13.09), 32% of stock price
AFS     $121,725 million cost – $113,594 million fair value = $8,131 million loss
HTM   $297,059 million cost – $255,521 million fair value = $41,538 million loss
*Total loss $49,669 million

Western Alliance Bancorp (WAL) loss per share ($9.61), 19% of stock price
AFS     $7,973 million cost – $7,092 million fair value = $881 million loss
HTM   $1,284 million cost – $1,112 million fair value =$172 million loss
*Total loss $1,053 million

Bank of America (BAC) loss per share ($14.28), 47% of stock price
AFS     $225,485 million cost – $220,788 million fair value = $5,697 million loss
HTM   $632,863 million cost – $524,267 million fair value = $108,596 million loss
*Total Loss $114,293 million

PacWest Bancorp (PACW) loss per share ($8.25), 67% of stock price
AFS     $5,655 million cost – $4,843 million fair value = $812 million loss
HTM   $2,271 million cost – $2,110 million fair value = $161 million loss
*Total loss $973 million

Navellier & Associates does not own PacWest Bancorp (PACW), Bank of America (BAC), Western Alliance Bancorp (WAL), Wells Fargo (WFC), First Republic Bank (FRC), U.S. Bancorp (USB), Signature Bank (SBNY), JPMorgan Chase (JPM), and Citigroup (C), in Managed accounts. Bryan Perry does not personally own PacWest Bancorp (PACW), Bank of America (BAC), Western Alliance Bancorp (WAL), Wells Fargo (WFC), First Republic Bank (FRC), U.S. Bancorp (USB), Signature Bank (SBNY), JPMorgan Chase (JPM), and Citigroup (C).

This data comes from the respective banks’ latest 10-Ks that reflect December 31, 2022 numbers, before the quarter-point rate hike on February 1 and the second quarter-point rate hike on March 2 by the Federal Reserve, with another one possibly coming on May 1. These are glaring numbers and are only a small sample of what’s probably out there. I can only imagine the Q&A on the earnings calls with bank CEOs in the coming weeks, which may eventually result in the release of a movie the likes of Margin Call.

Thankfully, bond yields have come down recently, but they need to come down considerably more to plug some of the gaps created by the poor practice of locking in miniscule yields on long-date debt. Aside from JPMorgan Chase & Co., investors should consider bargain hunting in other sectors. Until the price action improves (rising share prices on rising volume), further downside is a very real risk. For income investors, as long as T-Bills are paying 5.0%, it’s hard to imagine this situation improving anytime soon.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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