What happened
Shares of several regional and super-regional banks bounced back somewhat on Tuesday from the sectorwide sell-off that was triggered by the collapses of three banks over the last week.
As of 1:20 p.m. ET Tuesday, shares of KeyCorp (KEY 0.62%) were trading close to 11% higher, shares of Huntington Bancshares (HBAN -0.22%) were trading more than 1% higher (down from as much as 19% higher earlier in the session), and shares of First Foundation (FFWM -9.25%) were up more than 20%.
So what
As many now likely know, three U.S. banks have collapsed in a matter of days. Crypto-focused bank Silvergate Capital (SI 11.11%) announced on Thursday that it would wind down operations and liquidate. Then SVB Financial (SIVB.Q) was put into receivership by the Federal Deposit Insurance Corp. (FDIC) on Friday, and on Sunday, New York state regulators closed Signature Bank (SBNY).
Image source: Getty Images.
Since then, it's been chaos for bank stocks, especially in the regional space, and shares sold off intensely on Monday. While SVB, Signature, and Silvergate all have different models and there were different reasons for their failures, the core issue is that deposit outflows forced all three of these banks to sell bonds while they were trading at steep losses. In the case of Silicon Valley Bank, those bond losses were enough to wipe out all of its tangible common equity. Silvergate and Signature also had crypto businesses that have been struggling and under intense scrutiny since the collapse of FTX.
At the end of 2022, KeyCorp had about $6.4 billion of unrealized losses in its available-for-sale (AFS) bond portfolio -- bonds the bank intends to sell before maturity. In KeyCorp's held-to-maturity bond (HTM) portfolio, it had unrealized losses of $597 million. KeyCorp had roughly $8.2 billion of tangible common equity at the end of 2022, but keep in mind the AFS losses are assessed on a mark-to-market basis, and have already been taken into account on equity.
Huntington had AFS unrealized losses of $3.8 billion and HTM unrealized losses of roughly $2.3 billion, while its tangible common equity stood at about $9.8 billion at the end of 2022. Finally, First Foundation at the end last year had AFS unrealized losses of $15.6 million and HTM unrealized losses of $89.5 million, while shareholders' equity was nearly $1.1 billion
Now what
While most of these banks do have significant unrealized losses in their bond portfolios, the majority of those losses are in their AFS portfolios, which means they've already been factored into their financials. Also, unlike SVB, these banks do not have enough unrealized bond losses in their portfolios to wipe out their equity even if they had to sell all of the bonds now, while those investments are trading at a loss.
Additionally, SVB had significant deposit concentration among venture capital and private equity companies, as well as early-stage start-ups. KeyCorp, Huntington, and First Foundation all have much more diverse deposit bases, with KeyCorp and Huntington being more traditional institutions serving a wide range of industries. And First Foundation has, in its own words, "limited-to-no direct exposure to venture capital-backed deposits."
Ultimately, I think these three banks will survive the chaos, but there are real challenges ahead for regional banks, which have taken a reputational hit from the collapses of SVB and Signature. I would also expect deposit outflows and higher deposit costs, which would have been an issue even without these bank failures, to weigh on earnings in the near term.
If you can cope with volatility, I definitely think it would be worthwhile to open small positions in some of the banks that have been sold off recently. But before you invest, make sure to look at the unrealized losses in those institutions' bond portfolios, the diversity of their depositor bases, and what percentages of their deposits were FDIC-insured at the end of 2022.
