Source: CICC Strategy
Authors: Liu Gang, Li Hemin, Yang Xuanting

The resurgence of the First Republic Bank crisis made the market realize that the problems with small to medium banks in the US may not be over yet. In this article, CICC will focus on answering some common concerns of investors, taking into account the latest situation:

Q1. How big is the Bank of America problem, and what other banks are likely to have problems?

The root cause of this round of banking problems is that under monetary tightening, unexpected events amplified the original pressure on the asset side, debt side, and profit side, and social networks fueled the risk exposure by the day or even the hour. Even if the policy response was very quick and timely, it hardly left banks much room for maneuver.

Filter through the three dimensions of asset side, debt side, and profit side:

1)$Western Alliance Bancorp (WAL.US)$,$PacWest Bancorp (PACW.US)$and$Zions Bancorp (ZION.US)$, but on a smaller scale;

2) Those with large assets$U.S. Bancorp (USB.US)$(nearly $700 billion) and$Truist Financial (TFC.US)$(Nearly $600 billion) also has similar exposures, which are worth focusing on. If something goes wrong, the infectious effect is far less than that of small banks.

Q2. To what extent will it be a start, and what are the chances of the end?

As long as the currency remains tight, or will continue to face a slow “blood loss” process, some small to medium banks may also be exposed to risks. Policies can be provided through liquidity as a firewall to “first-aid” transition and isolate the spread of risk. What needs to be emphasized, however, is that there is a fundamental difference between the slow “loss of blood” and the sudden outbreak of a crisis, the bankruptcy of a small bank and the problems of systemically important banks.

Q3. Small to medium bank risk = systemic financial risk?

This risk is essentially a liquidity issue, not a leverage or asset quality issue. It is fundamentally different from 2008. The quality of underlying assets is relatively good, leverage is not high, and policies are responded to in a timely manner. This is the main basis for our judgment that it is not a systemic risk.

Q4. The market has not responded much; is it too blindly optimistic, or is the real impact really limited?

The impact on overall financial liquidity was limited this time around. If risk remains manageable and small, the impact on the overall market will remain manageable, but it will stifle sentiment. After the risk gradually subsided, too many loose expectations were taken into account, or they faced a backlash.

Q5. What are the “secondary risks” revealed by the problems with small to medium banks in the US?

The current banking problem will accelerate the overall credit contraction, particularly industrial and commercial real estate loans dominated by small to medium banks. Under a steady path, suppressing growth may even help inflation fall; under the extreme path, there may be a credit shock on assets that are highly dependent on high-interest financing. Among them, commercial real estate and high-yield bonds, which are more exposed, deserve close attention.

Editor/Somer