As the ramifications of the collapse of Silicon Valley Bank continue to wreak havoc in the markets, there is a palpable sense of panic on Wall Street right now.
While the banking sector has seen its constituent stocks soar in recent years, investors of all stripes have been giving it a wide berth lately as the increasingly high-risk nature of the industry becomes apparent.
In fact, as confidence in the space has diminished the last week, market participants have steadily rotated out of their positions to seek more secure investments elsewhere. Although this trend is reflected in declining share prices across the board, banking stocks have nevertheless been acutely affected.
It appears that investors’ waning interest in financial equities could signal some lean times ahead. The prospects of increasing volatility – combined with decreased access to capital for the institutions themselves – could spell trouble for many more traditional banking outfits too.
Likewise, people are asking whether the repercussions from SVB’s demise might trigger a broader contagion, taking down even the giants of the banking world.
Indeed, one such giant is Bank of America. The company has yet to dodge the Silicon Valley bullet, losing 20% of its value in the last month alone.
But what kind of headwinds will Bank of America have to weather if it is to hold out against this macroeconomic turmoil? And is the organization, as some believe, just too big to fail?
The Compelling Bull Case For Bank of America
After the fall of SIVB in early March, there has been renewed focus on the resiliency of financial institutions operating in uncertain market conditions.
A key aspect of this concerns the size of a bank’s capital deposits in relation to its total assets. This is important because a higher ratio implies greater stability and sustainability for a business in the future.
For instance, a robust deposit base is a significant driver of a bank’s financial health for several reasons.
To begin with, having large cash reserves is a critical factor that informs a bank’s liquidity profile, ensuring that adequate funds are available if customer withdrawal volumes escalate unexpectedly.
Moreover, it also reduces expenditures as it is considered a reliable source of low-cost capital. This is advantageous over other kinds of funding – such as debt issuance or borrowing from the market – which typically carries more onerous levies.
In addition, having high stores of assets already saved up can expand a bank’s lending capacity, enabling the institution to increase its loan portfolio and generate additional interest income. This not only drives top-line growth but supports the bank’s credit quality by diversifying its book and reducing concentration risk.
Fortunately, Bank of America’s deposits are rising because of weak-performing regional banks. Customers, who ordinarily give their business to smaller firms like Huntington Bancshares and Fifth Third Bancorp, are transferring their accounts to more prominent, seemingly safer players. In fact, some reports suggest that Bank of America has received $15 billion in new deposits since the bankruptcy of SVB.
In the long run, the perception among the public that BAC is a less risky place to leave one’s life savings will contribute to revitalizing its fortunes.
Besides, Bank of America has other advantages over its beleaguered peers. It is a well-diversified business encompassing commercial and consumer banking, with an investment wing and wealth management segments to boot.
All-in-all, the bull thesis for Bank of America looks water-tight from many angles. And, with the recent uptick in selling pressure, the stock may not be this cheap for long.
Beware: BAC Is Not A Risk-free Bet
Just before the Silicon Valley Bank catastrophe started to unfold, the Federal Deposit Insurance Corporation (FDIC) chairman, Martin Gruenberg, remarked that almost all banks were holding “some amount of unrealized losses on securities.”
While his comments didn’t make headlines when first uttered, they certainly did a couple of days later, when, infamously, SVB went down in large part due to the losses it incurred on the sale of its bond portfolio.
This was a timely reminder that, despite the regulatory reforms made in response to the 2007-2008 Global Financial Crisis, banking structures remain somewhat fragile.
What’s more, market risk – especially that related to fluctuations in bond price movement – is a type of systemic risk that, regrettably, banks will always be susceptible to, making it difficult for financial enterprises to arbitrage their way through.
To demonstrate how vulnerable banking stocks are at the moment, you need only examine the mess that Credit Suisse is in.
Having witnessed its share price drop to record lows, the firm is in damage-limitation mode today. The under-fire company had received an emergency lifeline payment from the Swiss National Bank, and it will likely have to merge – possibly with UBS – to ensure it survives its present predicament.
Worryingly, Credit Suisse is often thought of as one of those “too big to fail” entities. Its name is synonymous with the banking industry, and has an illustrious 167-year-old history to back it up.
Conclusion: Is Bank of America In Trouble?
Without ignoring the sturdy buy thesis for Bank of America, this current set of circumstances is so fluid and fast-moving that it might be better to wait and see where the chips eventually fall.
Yes, the opportunities are there to snap up a bargain. But if market chaos endures, it could sting less cautious investors in the process.
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