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This week's Federal Reserve balance sheet data implies that liquidity stress remains elevated, but is stabilizing, wrote UBS analysts led by Erika Najarian.
Banks borrowed a total of $163.9B through the Federal Reserve's discount window and its Bank Term Funding Program in the week ended March 23, down by $1B from the previous week.
Financial institutions borrowed $110.2B from the discount window, down from $152.85B in the prior week; and $53.7B from its Bank Term Funding Program, up from $11.94B in the prior week, according to the Fed's balance sheet statement.
Najarian pointed out that while there's usually a "stigma" associated with borrowing from the Fed's BTFP facility, it offers a lower borrowing rate than the discount window — 4.7% vs. 5.0% for the discount window, "a meaningful savings in a funding squeeze."
UBS analysts estimate that banks have also been turning to Federal Home Loan Bank funding. "While the real time data on FHLB borrowings is significantly more limited, news reports indicate the FHLB issued $304B in debt last week vs. the $823B in FHLB advances at year-end," they said.
Overall, the UBS analysts observes a "buyers' strike" in banks given continued concerns over liquidity tail risks and the likelihood that this liquidity stress will lead to credit contraction and thereby, a recession."
Looking at specific banks, Najarian and team see Bank of America (NYSE:BAC) as looking "especially dislocated," as it has borne the brunt of fears over hold-to-maturity securities unrealized loss/capital screens, a metric they consider meaningless.
In its favor, Bank of America (BAC) "offers what the market seems to be desiring now, at a discount to" JPMorgan Chase (NYSE:JPM): "1) a granular retail deposit base, with a strong base of operating accounts across retail and commercial; 2) a balance sheet fortified by a decade plus long strategy of "responsible growth," which will be of meaningful value in a recession; and 3) limited CRE (commercial real estate) exposure."
The biggest dislocations in midcap regional banks are Western Alliance (NYSE:WAL), Comerica (NYSE:CMA), both buy rated at UBS, Synovus Financial (NYSE:SNV), and East West Bancorp (NASDAQ:EWBC), both neutral. "If fears around funding/deposit flows don't materialize until quarter-end, we would expect more of a snap back in these stocks," they said.
The SA Quant system put Hold ratings on BAC, JPM, CMA, SNV, and EWBC, but rates WAL a Sell, according to the SA peer comparison tab. From a long-term perspective in stock performance, JPMorgan (JPM) has risen 160% in the past 10 years, the most of the group.
SA contributor Ironside Research explains why Bank of America (BAC) is a Buy in this banking crisis. And see why Cavenagh Research sees Western Alliance (WAL) as potential triple-digit upside opportunity for the brave.
More on the Bank Crisis:
Fed’s Bullard says further federal response can ease bank stress
Moody's warns on spillover risk; banks continue emergency borrowing
U.S. prepared to take more actions to ensure deposits are safe, Janet Yellen says
EU regulators to focus on liquidity rules after Credit Suisse debacle