In early 2023, we witnessed huge volatility in the US Regional Banks. A key issue, brought to the forefront of the market’s attention in March, is that Bank assets and liabilities are at an extreme duration mismatch. Balance sheets are filled with long-duration, low-yielding fixed income securities and loans, while liabilities can be shorter-term than previously anticipated. As interest rates rose, the value of their assets declined substantially.
As we cited in our 23rd August blog, unless interest rates drop dramatically, we were likely to see more regional banks under stress and further subsequent consolidation. Some banks will be negatively impacted by their asset liability mismatch and credit portfolios. Others will excel, benefitting from superior credit profiles and diversified business models that permit them to take advantage of market dislocation to gain market share.
As we did in our previous blogs on regional banks, below we have plotted the daily Bitvore Sentiment Scores for a sample of small US Banks whose loans books are estimated to be over 50% exposed to US commercial property.
We have witnessed plenty of volatility in the share price movements of these banks over the last year.
A number of these banks share price experienced healthy Q2 share price appreciation until early August, though, with the exception of Customers Bancorp, most of which has since been eroded over the subsequent last two months.
We are now in Q3 Banks results season, with Bank of America, Bank of New York Mellon and Goldman Sachs announcing Q3 earnings today.
It is obviously important to note that there are vast differences in the quality of banks as well as diverse operating models which will result in broadly varied outcomes. These nuanced differences are will not be fully appreciated by many investors and are may not reflected in stock prices, thereby making the sector opportunity-rich. Given the recent share price movements the market would seem to be in make your mind up territory.
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