News

Our two financials differ from failed Silicon Valley Bank. But we’re not buying the dips yet

Published

3 months ago

March 11, 2023

The failure of Silicon Valley Bank is raising questions about the overall financial sector, which includes Club holdings Wells Fargo (WFC) and Morgan Stanley (MS). The trepidation is understandable given SVB’s demise is the biggest banking collapse since the global financial crisis and the second largest in U.S. history. Bottom line While both Wells Fargo and Morgan Stanley have clear differences with SVB and face more regulatory scrutiny, we’re not using recent weakness in their stock prices to buy additional shares just yet. We know our banks operate in distinct ways compared to SVB, which was the go-to bank for Silicon Valley startups and venture capital firms. However, the market wants to bring down all the financials. There will be a time to buy these franchises. For now, we’re waiting for the market to realize that Wells Fargo and Morgan Stanley are different. We want to be patient to ensure that we aren’t buying too early into the fallout, which could get worse from here. As Jim Cramer said on Friday’s Homestretch , we’re going to regroup over the weekend, assess the damage, and then look ahead to next week to see if some buy-on-the-dip opportunities arise in a now oversold market. Big picture Shares of Wells Fargo, Morgan Stanley, and the broader banking sector have faced pressure due to the SVB saga over the past couple of days. Morgan Stanley continued its slide Friday, closing down 2.3%. However, Wells Fargo turned positive by day’s end, gaining more than half of a percent. The overall stock market ended Friday sharply lower, though off session lows. Still, the Dow Jones Industrial Average had its worst week since June as money poured out of stocks and into the perceived safety of bonds. The 2-year Treasury yield, which just topped 5% this week for the first time since 2007, settled at 4.58% on Friday The issues at SVB Financial (SIVB), parent of Silicon Valley Bank, are considerable and ultimately led California regulators to close Silicon Valley Bank on Friday. The Federal Deposit Insurance Corporation was named as the receiver and established an entity to hold SVB’s insured deposits. Shares of SVB sank 60% on Thursday and then another 60% in the following day’s premarket before they were halted. The stock never opened Friday. Shortly after being halted and before the FDIC news, CNBC reported that SVB Financial began discussions about selling itself. The overtures came after SVB’s attempts to raise more than $2 billion in capital — developments disclosed Wednesday night that set in motion Thursday’s plunge — were unsuccessful, according to CNBC sources. SIVB 6M mountain Shares of SVB Financial over the past six months. SVB is a very different kind of bank than Wells Fargo and Morgan Stanley, and its distinct characteristics are central to what’s unfolded over the past few days. SVB’s problems stem in large part from its tech startup and venture capitalist customer base. The Federal Reserve’s interest-rate hiking campaign has tightened financial conditions, making it harder for the many startups that bank with SVB to raise additional outside capital. In this environment, startups were using up a lot of money that had been deposited in SVB bank accounts to run their businesses. Client cash burns has been two times higher than pre-2021 levels, SVB said Wednesday, leading to lower-than-expected deposits. Looking to shore up its financial position, SVB sold $21 billion worth of assets — including U.S. Treasury bonds— booking a $1.8 billion after-tax loss in the process. To understand why those bonds were sold at a loss, remember what’s happened lately with rates. Bond prices move inversely to yields. As policy rates controlled by the Fed went higher and higher over the past year, that meant the bond yields were rising and bond prices were declining in value. SVB intended to take those proceeds and reinvest them in shorter-term assets, which are less sensitive to changes in interest rates. Other banks may also be sitting on paper losses on some parts of their bond portfolio. However, as JPMorgan analysts pointed out in a note to clients Friday, larger banks like Wells Fargo have considerably better liquidity and diversified deposits that should allow them to avoid needing to sell a bunch of securities like SVB did. We agree with the multiple Wall Street analysts who thought that Thursday’s market reaction to SVB’s problems was excessive. However, as we saw Friday, we prefer to err on the cautious side and not buy until the ramifications of the collapse are known. “We believe the sell-off was overdone as large banks have a lot more liquidity than smaller banks, they are more diversified with broader business models, have a lot of capital, are much better managed in regards to risk, and have a lot of oversight from regulators,” JPMorgan analysts also wrote. TD Cowen analyst Jaret Seiberg added in a note Friday: “We do not see this as the start of a broader threat to the safety and soundness of the banking system.” “Much like Silvergate, Silicon Valley had a unique business model that was less dependent on retail deposits than a traditional bank,” Seiberg wrote, referencing crypto-focused bank Silvergate’s recent plans to liquidate. “This left the bank more exposed to interest rate risk as its funding got more expensive, but its assets were not repricing higher.” Wells Fargo is a turnaround story WFC 6M mountain Wells Fargo’s stock price over the past six months. The turnaround story at Wells Fargo is still intact, which gives us the confidence to see through some of the near-term headwinds the bank may face regarding net interest margin (NIM). The rise in interest rates has helped Wells Fargo make more money from NIM, the difference between what it pays customers for their deposits and what it charges for loans — a dynamic we’ve called out repeatedly over the past year . However, some of that benefit is being offset now, as rates have reached a point where customers may look to move deposits to higher-yielding alternatives such as money-market funds. This is putting upward pressure on banks’ deposit costs, which basically means they’re paying a higher rate to entice savers to keep money in their accounts. This could challenge Wells Fargo’s net interest margin, to some degree. At the same time, Wells Fargo’s very low deposit beta — the percentage of an interest rate hike that gets passed on to customers — should mean it is hurt relatively less than peers. More generally, CEO Charlie Scharf has continued to make progress on moving Wells Fargo beyond its scandal-ridden past and, eventually, having a regulator-imposed asset cap removed. We’re willing to be patient with the stock while that plays out and management maintains expense discipline. Wells Fargo still finished down nearly 12% week to date, compared with the S & P 500 financial sector’s decline 6.87% over the same stretch. The stock was still above breakeven year to date compared to the S & P 500 ‘s less than 1% gain in 2023. Morgan Stanley is different from WFC MS 6M mountain Morgan Stanley’s stock performance over the past six months. Morgan Stanley is a different bank than Wells Fargo, and our confidence in its multiyear transformation under CEO James Gorman has not wavered. Morgan Stanley is now more of an asset management firm, with a fee-based business model that provides stability to earnings compared with its investment-banking roots. Morgan Stanley shares remained under pressure Friday and dropped 8.4% for the week. However, the stock has been an outperformer so far in 2023 and remained up 5.9% year to date. We’re waiting to hear more from Morgan Stanley, but its fee-based business model should help protect it from interest rate-related challenges. (Jim Cramer’s Charitable Trust is long WFC and MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED. (Jim Cramer’s Charitable Trust is long WFC and MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

People walk past a Wells Fargo bank on 14th Street on December 20, 2022 in New York City.

Michael M. Santiago | Getty Images

Source: CNBC

Follow us on Google News to get the latest Updates