Get set for a spectacular rally in bank shares that has already begun in the pre-market. First Citizens will acquire the loans/deposits of SVB from the FDIC injects badly needed confidence into the US banking system. Deutsche Bank is also a false alarm as the 40% spike in its credit default swaps on Friday was due to panic selling in European banks rather than any fundamental issue of capital, liquidity or duration risk management.
Mr. Market loves the SVB deal since First Citizen is up 10% and I would not be surprised to see Bank of America and Wells Fargo rise 5 to 6% on the NYSE in a classic echo trade tonight. I have no interest in buying the shares of US smaller/regional banks as they are still vulnerable to deposit flight, have 43% loan book exposure to commercial real estate, face high funding cost due to the spike in Fed discount borrowings and will suffer disproportionately as lending protocols tighten on the eve of even a shallow recession. In bank stock investing, I want to be Godzilla – size matters!
The 2008 bank contagion death loop has been short circuited by the First Citizens/SVB deal. This does not mean all is hunky dory in the global banking village as First Republic Bank is still a wild card though its shares are up a yummy 30% in the premarket. While credit/bank funding markets will remain unsettled, I do not see the enactment of a 2008 scale forced Lehman credit Armageddon scenario that is now priced into Big Bank shares. An asymmetric risk/reward calculus makes me a nervous but tactical bull, at least for tonight on the NYSE.
The Yankee bank preferreds market is also a beneficiary of the March madness we just witnessed. The $400 billion preferred/senior equity market is dominated by bank issuers and was slammed by SVB, Signature Bank and First Republic’s woes. SVB preferred on the NYSE obviously blew up and wiped out its investor base. Yet this is the moment to accumulate bank preferred shares of money center colossi like J.P. Morgan, Bank of America and Citigroup or even a diversified bank preferred tracker that got slammed by 9% in the March banking crisis but yields 6.5% now.
The 10 year US Treasury bond trades at 3.47% but I can generate a 6.2% yield on money center Yankee preferreds that have zero default risk in my world view. If the House of Morgan or Bank of America ever defaulted on payouts to their preferred shareholders, they could never pay a dividend to their common stockholders or more importantly, put a dime in the bonus pool of senior management. Jammie Dimon will attest to Madonna’s hit song “material girl… the guy with the cold hard cash is always Mr. Right”. A whacko resume trade? First Republic Bank Series N trades at a yield to maturity of 18.1%. If the bailout succeeds (it will), this puppy will fly. This is no trade for widows, orphans, coupon clippers or those without abdominal fortitude.
Also published on Medium.