The Zhitong Finance App learned that CITIC Securities released a research report saying that as we enter 2024, the US banking sector is still in trouble, and small and medium-sized banks in the region will face further twists and turns. In this context, defensive industries such as core consumption and healthcare are expected to further highlight their value, while cyclical industries may face more serious market challenges, and there is a greater risk of a pullback. The team predicts that if risks in the US banking sector erupt, the future trend of the US stock market may be similar to the market performance when the Bank of Silicon Valley went bankrupt in 2023, mainly affected by fluctuations in investor sentiment; under this situation, the cyclical industry sector of US stocks will still face greater market correction pressure.

The dark clouds in the US banking industry have not dissipated, and regional banks have experienced further twists and turns.

Since 2023, the US banking industry has been plagued by turmoil. Five banks successively went bankrupt during the year, including Silicon Valley Bank, First Republic Bank, and Signature Bank. However, even as we enter 2024, the turmoil in the US banking industry has not subsided. At the beginning of 2024, financial data released by the New York Community Bank (NYCB) triggered deep concerns in the market, and its stock price fell sharply, further exacerbating the tense situation in the banking industry. However, the situation of US regional banks is even more worrying. The decline in the ETF (KRE) tracking regional banks and the S&P 1500 Regional Bank Index significantly exceeded the overall banking index. This shows that investors' pessimistic expectations have been concentrated from the entire US banking industry to regional banks.

The US banking crisis has not been resolved, and unrealized losses on securities investment and commercial real estate risks have become the main sticking points.

Since the Federal Reserve began the interest rate hike cycle in March 2022, the continued rise in interest rates has significantly increased the borrowing costs of businesses and individuals, and has had a great impact on the US commercial banking system. As of the first quarter of this year, unrealized losses on US banking securities investment remained high at $515.6 billion. At the same time, in the S&P 1500 Bank Index, nearly half of bank securities investments account for a high proportion of total assets, and the potential risk exposure brought about by a high proportion of investment securities still needs to be wary. On the other hand, hampered by the high vacancy rate of office buildings in the US, the US commercial real estate market continues to be sluggish. However, in the next two years, CRE loans of up to 1.2 trillion US dollars will expire, and the risk of refinancing in an environment with high interest rates cannot be ignored. Small and medium commercial banks in the US face higher risks due to their large holdings of CRE loans. According to CITIC Securities's sensitive analysis, if CRE loans held by commercial banks in the US default by 10%, the primary capital loss rate of large US commercial banks is relatively low, but the loss rate of small to medium commercial banks may be as high as 24.2%. Therefore, for small and medium-sized banks with high risk exposure to CRE loans and high floating loss amounts, the explosion of risk in the commercial real estate market and the impact of unrealized losses on investors' confidence may cause them to face serious capital losses and operational challenges.

Mountain Rain Is Coming: Small and Medium Banks in the US Are Under Pressure, How to Interpret the US Stock Market?

Under the pessimistic expectations of the US National Bureau of Economic Research (NBER), the US may face the potential risk of bankruptcy of as many as 385 regional banks due to CRE non-performing loans, while more than 1,700 banks are also within the risk threshold. Going back in history, if this pessimistic situation were to break out, the risk process in the US banking sector might be similar to the savings and loan crisis. However, considering that it has been more than 30 years since the last savings and loan crisis, if the NBER's pessimistic expectations are verified, the impact of the US banking risk outbreak on the capital market may be comparable to the 2008 global financial crisis; at that time, defensive industries such as core consumption and healthcare are expected to further highlight their market value, while cyclical industries may be under greater market pressure. However, since the global financial crisis, the US financial supervision system has undergone systematic reforms, enhancing the stability of the financial system. Therefore, the risk that the current stressful situation of small and medium-sized banks will trigger a systemic financial crisis is still low. According to the NBER's benchmark expectations, if some small to medium banks do face the risk of bankruptcy, CITIC Securities anticipates that the US stock market's interpretation may be similar to the 2023 Silicon Valley Bank (SVB) bankruptcy incident, and the market trend is mainly driven by investor sentiment; in this situation, the market performance of the cyclical industry may continue to be pressured, while the market performance of the defensive industry may be relatively stable.

Risk Factors:

1) The timing of the Federal Reserve's interest rate cut and the shift in global liquidity exceeded expectations; 2) the global geopolitical conflict further escalated; 3) US banking performance fell short of expectations; 4) US commercial real estate risks exceeded expectations.