According to a research report released by Citic Sec, as we enter 2024, the crisis in the US banking industry will persist, and regional small and medium-sized banks will encounter another wave of setbacks. Under this background, defensive industries such as core consumer and medical care are expected to further highlight their value, while cyclical industries may face more severe market challenges and significant downside risks. The team predicts that if the US banking risk erupts, the future market performance of the US stock market may be similar to that of the Silicon Valley Bank's bankruptcy in 2023, mainly affected by fluctuations in investor sentiment. Under this scenario, the cyclical industry sectors of the US stock market will still face significant market downward pressure.

The US banking industry is still facing difficulties and regional banks are facing another setback.

Since 2023, the US banking industry has been plagued by turmoil, with five banks going bankrupt within the year, including Silicon Valley Bank, First Republic Bank, and Signature Bank. However, even as we enter 2024, the storm in the US banking industry has not calmed down. In early 2024, the financial data released by New York Community Bancorp (NYCB) triggered deep concerns in the market, and its stock price fell sharply, further exacerbating the tense situation in the banking industry. Regional banks in the United States are in an even more precarious situation, with the ETF (KRE) tracking regional banks and the S&P 1500 Regional Banks Index falling significantly more than the overall banking industry index, reflecting that investors' pessimistic expectations have shifted from the entire US banking industry to regional banks.

The crisis in the US banking industry has not yet been resolved, and the risks of unrealized losses in securities investments and commercial real estate have become the main stumbling blocks.

Since the Fed initiated the interest rate hike cycle in March 2022, the sustained rise in interest rates has significantly increased the borrowing costs of enterprises and individuals, exerting a significant impact on the US commercial banking system. As of the first quarter of this year, unrealized losses on securities investments in the US banking industry still maintained at a high level of USD 515.6 billion. At the same time, in the S&P 1500 bank index, securities investments of nearly half of the banks accounted for a relatively high proportion of total assets, and the potential risk exposure brought by high proportion investments in securities still needs to be vigilant. On the other hand, constrained by the relatively high vacancy rate of office buildings in the United States, the US commercial real estate market continues to be sluggish. In the next two years, up to USD 1.2 trillion of CRE loans will expire, and the risk of refinancing under high interest rate environment cannot be ignored. Small and medium-sized commercial banks in the United States, which hold a large amount of CRE loans, are facing higher risks. According to the sensitivity analysis of Citic Sec, if the CRE loans held by US commercial banks default by 10%, the Tier 1 capital loss rate of large commercial banks in the United States is relatively low, but the loss rate of small and medium-sized commercial banks may reach 24.2%. Therefore, for small and medium-sized banks with large exposure to CRE loan risks and high unrealized loss amounts, the outbreak of risks in the commercial real estate market and the impact of unrealized losses on investor confidence may lead to severe capital losses and operational challenges.

A storm is brewing: US small and medium-sized banks are under pressure, how will the US stock market perform?

Under the pessimistic expectation of the National Bureau of Economic Research (NBER) in the US, due to the impact of CRE non-performing loans, the United States may face potential bankruptcy risks of up to 385 regional banks, and more than 1,700 banks are also within the risk threshold. Looking back at history, if this pessimistic scenario erupts, the risk process of the US banking industry may be similar to that of the savings and loan crisis. However, considering that more than thirty years have passed since the last savings and loan crisis, if NBER's pessimistic expectations are verified, the impact of the outbreak of risks in the US banking industry on the capital market may be comparable to that of the global financial crisis in 2008. At that time, defensive industries such as core consumption and medical care may further highlight their market value, while cyclical industries may face greater market pressure. However, since the global financial crisis, the US financial regulatory system has undergone systemic reforms, enhancing the stability of the financial system. Therefore, the risk of triggering systematic financial crises by the pressure scenario of small and medium-sized banks is still low. Under the benchmark expectation of the NBER, if some small and medium-sized banks do face bankruptcy risks, Citic Securities predicts that the performance of the US stock market may be similar to the bankruptcy event of Silicon Valley Bank (SVB) in 2023, and the market trend will be mainly driven by investors' sentiment. In this scenario, the market performance of cyclical industries may continue to be under pressure, while the market performance of defensive industries may be relatively stable.

Investment strategy:

1) Fed cuts interest rates and global liquidity turns earlier than expected; 2) Further escalation of global geopolitical conflicts; 3) US banking industry performance falls short of expectations; 4) US commercial property risks exceed expectations and escalate.