Which US Banks Are In Trouble?

Indeed, the genesis of the crisis can be traced back to a sudden uptick in the federal funds benchmark lending charge, which set off a domino effect of panic and uncertainty.

Already grappling with the twin demons of oversupply and stilted demand, the increased borrowing costs that followed sent shockwaves through the commercial real estate market. The plot thickened with the possible onset of an economic contraction, leading to a sharp drop in consumer spending and a spike in loan defaults.

In the face of this financial maelstrom, government and regulatory bodies decided that a drastic intervention had to occur. A key lifeline was thrown in the form of the Bank Term Funding Program, designed to infuse banks with the liquidity needed to keep their operations afloat and meet their commitments. Simultaneously, a concerted effort was made to rebuild the shaken confidence in the nation’s banking system.

Nevertheless, despite these measures, the fear has not yet subsided. A frightening proportion of financial institutions are still finding their footing following the catastrophic events, and concerns are widespread regarding their endurance in the presence of forthcoming disruptions.

Therefore, the following article will peel back the layers on the current state of the industry today, offering a comprehensive analysis of two of the biggest banks still under threat, examining their present predicament and the hurdles they must yet confront.

PacWest Bancorp (PACW)

As a mainstay of the US regional banking scene, PacWest Bancorp has been making significant moves to ensure its survival amidst a volatile financial landscape.

For instance, after the sale of a $3.54 billion loan portfolio to Ares Management in June, the bank’s stock has soared around 34% to $971, with many seeing the action as a strategic maneuver to bolster the bank’s balance sheet and reduce its exposure to riskier assets.

But this decision has not come without its drawbacks. The sale – primarily composed of high-yield assets – has significantly decreased PacWest’s income, with the firm effectively transferring its balance sheet risks to its income statement in a move that may jeopardize its long-term valuation.

Regrettably, this might not be so unfortunate if the corporation didn’t incur a quarterly net deficit of $1.21 billion during the initial reporting period of fiscal 2023. Nonetheless, it has diminished its unachieved losses from $791 million in December 2022 to $736 million in March 2023.

Moreover, the bank has likewise executed drastic protocols to stabilize its financial situation, such as increasing deposit rates to over 5% to attract more customers. While this strategy has potentially halted cash outflow from its accounts, it has also decreased PACW’s net interest income.

Although the efforts to encourage deposits and sell its riskiest assets could guarantee PacWest’s short-term solvency, it may fundamentally impair its share price. The bank’s plan is likely to decrease savings and CD rates once adequate deposit levels are finally achieved; however, given the accelerating decline in the total US money supply, it may be unable to avoid competing for depositors until the Federal Reserve makes a significant dovish pivot.

Notwithstanding the challenges, PacWest’s immediate fortunes should be fine so long as there is no systemic increase in commercial property losses, for which its “loans are concentrated” to an unequal degree.

Nevertheless, PACW is sacrificing most of its income to secure its cash flows, offering no sustained reason for investors to buy.

Bank of America (BAC)

Bank of America is another institution that has to keep a close eye on its balance sheet. In fact, following the disclosure of a paper deficit of approximately $110 billion in the initial quarter of 2023, stakeholders were eager to witness the firm navigate a smoother trajectory as it entered the second phase of the fiscal year.

Lucky for them, BAC delivered some impressive results, with revenues of $25.2 billion up 11% and net income rising 19% to $0.88 per diluted share. This increase in profitability was mainly due to the 14% expansion in its net interest income of $14.2 billion, as well as its net interest yield, growing 20 basis points from 1.86% in 2022 to 2.06% today.

However, even though its unrealized losses amounted to $106 billion for the three months ending 30th June 2023, alarm bells have yet to chime at the Federal Reserve. Indeed, the bank’s average global liquidity sources spiked $13 million sequentially to $867 million, while BAC’s higher sales and trading activities led to an improved top line at $4.3 billion.

That said, Bank of America’s stock might not be so attractive now. For instance, after passing its recent stress test, the bank has reportedly begun a dialogue with the Federal Reserve over differences in Other Comprehensive Income over the 9-quarter stress period.

Perhaps more worryingly, BAC’s highly liquid total available-for-sale debt securities dropped from $166 billion in the first quarter to just $136 billion this time round, implying that the enterprise might not be as prepared for another shock as some would have liked.

Wrap-up

The banking crisis of 2023 has left a significant impact on the US banking industry, with several institutions still struggling with its aftermath. While measures such as the Bank Term Funding Program have provided some relief, the road to recovery is far from smooth.

PacWest Bancorp and Bank of America, two major banks still under threat, are setting a course through these challenging times with strategic decisions to ensure durability and resilience. Despite reducing its income, PacWest’s sale of a significant loan portfolio and efforts to attract more deposits reflects its focus on short-term solvency.

Conversely, registering a substantial unrealized loss in the initial quarter, Bank of America achieved remarkable outcomes in the next. Nonetheless, apprehensions about its balance sheet recuperation and potential discrepancies in its capital ratio suggest that it still has challenges to overcome.

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