As dust settles on banking sector, some analysts believe worst is over

UBS’ planned acquisition of Credit Suisse represents the latest shoe to drop in the challenges facing the banking sector, but there remains a high degree of calm among financial professionals and market watchers.

Regardless of how bad it looks that banks are scrambling to keep deposits on the books to avoid having to sell balance sheet holdings at a loss, the overriding theme is that this is not comparable to the financial crisis of 2008.

“The nuts and bolts of the banking system are working just fine,” said Paul Schatz, president of Heritage Capital.

He referred to recently troubled regional banks Silicon Valley Bank, Signature Bank and First Republic as “not part of what I would consider the money center bank system.”

“They are outliers and niche players that made some really stupid decisions,” Schatz said. “The big banks right now can’t even handle the influx of money and new account openings. I don’t know how it could be a crisis if money is flooding into the big banks.”

As the situation that nobody wants to call a crisis rapidly evolves, financial markets are already responding as if the worst is over.

Cameron Brandt, director of research at EPFR, said the mutual funds and exchange-traded funds that invest in the financial subsector of regional banks are suddenly experiencing record inflows.

While Brandt said active managers recognized the risk that higher interest rates presented to bank balance sheets and reduced exposure to banks over the past several months, he believes that markets are now interpreting the various government backstop efforts as evidence that lower interest rates are on the horizon, which could soften the blow of a looming recession.

“I won’t say fund managers anticipated the degree of the shock, but active managers collectively were reducing exposure to all the banks that failed,” he said. “The trend was very clear. Within the industry there was more awareness of rate risk, and I suspect when the dust settles we’ll discover that more financial institutions were on the defensive.”

David Barse, founder and chief executive of XOUT Capital, said his large-cap ETF eliminated its exposure to all banks except for Bank of New York last fall.

The GraniteShares XOUT US Large Cap ETF (XOUT) applies fundamental metrics to remove the 250 least appealing companies represented in the S&P 500 Index.

“It came down to deposit growth in banks,” Barse said. “Banks are being disintermediated by all kinds of other payment systems and banks weren’t able to deal with what was going on in an innovative world. People started taking money out of banks because they couldn’t get a return on it.”

Brad Lamensdorf, manager of AdvisorShares Ranger Equity Bear ETF (HDGE), said many of the bank stocks have taken such a beating they aren’t even worth shorting at this point.

“I think bank stocks have been completely punished and I see little opportunity to short for a while,” Lamensdorf said. “What the government did last week by lifting the $250,000 limit on FDIC insurance protection is like injecting capital into the marketplace without having to do much.”

Even though he anticipates it will take several quarters for bank balance sheets to work through the balance sheet yield imbalances, he doesn’t expect much more damage to the overall banking system.

“This isn’t 2008, but it will be difficult for banks to work through and into a different banking structure,” Lamensdorf said.