What happened
The banking sector saga is closing another chapter, as we close out the third week since the collapse of Silicon Valley Bank.
On Monday, 167-year-old institution Credit Suisse (CS) was bought out by UBS Group at a vulture price 56.7% below last week's close, according to data from S&P Global Market Intelligence.
Meanwhile, another high-profile coastal bank that caters to wealthy customers and businesses, First Republic (FRCB), may be in serious trouble, with all three ratings agencies downgrading the company's credit rating, despite larger banks infusing the company with deposits last week. First Republic fell 45.6% this week.
On the other hand, the regional banking crisis may also lead to opportunities for healthier regional banks that can pick up assets on the cheap. For instance, New York City Bancorp (NYCB 0.85%) purchased the higher-quality assets of Signature Bank held by the Federal Deposit Insurance Corp. (FDIC), after the FDIC took over the bank two weeks ago. In contrast to the others, New York City Bancorp's stock soared on the news, appreciating 31.7% through Thursday.
So what
The demise of Credit Suisse had been a long time coming, with some large recent loan losses, such as the blown-up margin loan made to hedge fund Archegos Capital Management, as well as several scandals in recent years encompassing bribery, fraud, and failure to prevent money laundering.
However, with the U.S. regional banking crisis causing depositors and investors to pull money out of any bank deemed suspect, time finally caught up with the Swiss banking giant. It was reported that Credit Suisse was suffering $10 billion in outflows per day last week.
But if Credit Suisse were to go bust, its failure might spread to the broader banking system in Europe, and therefore the world.
So Swiss authorities forced its sale to UBS this past weekend. But in order for UBS to agree to buy the company instead of allowing Credit Suisse to go bust, it asked for indemnity against billions in potential liabilities that still hovered over Credit Suisse. That resulted in the forced sale for about $3.2 billion -- a 56.7% haircut to Credit Suisse's share price at the end of last week.
Besides Credit Suisse, the other major bank making negative news was First Republic, a large U.S. regional also struggling for survival amid large depositor outflows. While First Republic hasn't been seized like Silicon Valley Bank or Signature Bank, it appears to be teetering on the edge. Last week, a consortium of the largest U.S. money center banks combined to put $30 billion in deposits back into First Republic, reigniting hope that that measure would boost confidence and stem the bleeding. But this week, the company faced new problems, as it became apparent the deposit infusion may not be enough.
On Monday, both S&P Global and Moody's downgraded First Republic's credit rating. As the week progressed, it was reported the company was still looking for ways to raise more capital. If that were to come in the form of an equity raise, that could be majorly dilutive to shareholders.
By midweek, sources close to the bank said First Republic was looking for ways to potentially sell off assets to third parties as an alternative if it couldn't raise additional capital on appropriate terms -- essentially shrinking itself in order to match its lower depositor base. To cap things off, ratings agency Fitch soon followed S&P Global and Moody's in downgrading the bank's credit rating Wednesday.
When all was said and done, First Republic had fallen 45.6% by end of trading on Thursday, and is now 94% below its 2021 highs.
Image source: Getty Images.
However, things weren't all doom and gloom for every regional bank. In fact, New York Community Bancorp rose 31.7% on the week through Thursday, following its acquisition of certain deposits and assets of bankrupt Signature Bank. Signature was seized by the FDIC two weeks ago, as it had gotten in trouble through an asset-liability mismatch and an ill-fated venture into the cryptocurrency industry.
However, New York Community Bancorp isn't buying those crypto assets. Rather, New York Community is purchasing $13 billion in loans within more traditional banking areas, such as commercial and industrial, small business, healthcare banking, and mortgage warehouse loans. Notably, NYCB is not assuming Signature's commercial real estate, multifamily housing loans, private equity loans, or Signature's credit card business. NYCB is also taking on $34 billion of deposits, and will receive $25 billion in cash from the FDIC in the transaction!
Of note, NYCB used to compete with Signature often in the New York area, so the acquisition of these assets and deposits will help the bank grow and strengthen its position in the state. Management expects the transaction to increase book value per share by 15%, and earnings per share by 20%, without lowering its capital ratios. No wonder investors were cheering the transaction.
Now what
It's a dynamic time in the banking industry, with inflation and rapid rate increases leading to the demise of banks that didn't properly prepare for this long-tail scenario. However, times of turmoil and crises can also be times of opportunity. Though Credit Suisse and some others are no more, and First Republic is struggling to survive, UBS and New York Community Bancorp are examples of banks that may emerge bigger and stronger.
Interested investors should look for conservatively run banks that prepared for higher interest rates with loyal depositors, who may stand to benefit from the fallout.
