US regional banks are seeing “permanently” elevated funding costs relative to their major competitors in the wake of the March turmoil that upended the sector and financial markets, according to Torsten Slok at Apollo Management.
Eight months after the collapse of Silicon Valley Bank, “large banks continue to enjoy significantly lower funding costs and, hence, higher profit margins than regional banks,” Slok, the firm’s chief economist, said in a note Tuesday.
He pointed to the spread on regional bank bonds, which ballooned in March relative to those of diversified lenders and has remained much wider than before the crisis.
Tighter lending conditions because of Federal Reserve rate hikes have added to the headwinds from commercial real estate holdings, held-to-maturity portfolios under water and regulatory uncertainty, and it all means that “it is going to take some time for regional banks to repair their balance sheets,” Slok wrote.
“This continues to be a macro problem, because banks number 5 to 4000 by assets make up 60% of all assets in the banking sector,” he said.
To preserve profitability with net interest margins compressing, banks have had to boost loan rates and tighten lending standards, adding to the risk that economic activity will slow. Bank lending has seen the largest annual decline on a percentage basis since 2009, Fed data show.
“We’ve seen rates going up for high-yielding loans quite quickly in the last six months and we are also seeing bank lending slowing down,” Slok said in an interview on Bloomberg Television Wednesday. “That is exactly what the textbook would have predicted. The Fed is in the process of slowing the economy down.”
In the minutes from the Fed’s recent gathering, policymakers observed that the banking system was “sound and resilient,” though many participants commented that unrealized losses on assets, significant reliance on uninsured deposits and increased funding costs at banks warranted monitoring.
(Adds comment from Slok, details of FOMC minutes.)
