After announcing the closure of Signature Bank on Sunday morning, U.S. regulators moved expeditiously to guarantee all deposits of both Signature Bank and Silicon Valley Bank on Sunday evening. This step is intended to ensure confidence in the U.S. financial system and mitigate the risk of other failures. There are implications for regulators as there were other regional banks that were down significantly on the news and may, over time, result in tighter underwriting standards, thus higher capital requirements going forward. The Fed actions (discount window and facility) meaningfully de-risk medium term bank run risk. However, regional bank stocks are moving out of fear in a reflexive cycle.
We believe that the majority of regional banks should be fine, but this will result in a significant impact to earnings as margins are likely to compress with increased cash sorting, deposit beta and net interest margin down from weaker lending. As a result, banks will likely conserve cash going forward.
The situation will likely call for increased scrutiny and regulation, i.e., include Accumulated Other Comprehensive Income (AOCI) in capital ratios similar to Globally Systemically Important Banks (GSIB), which will have negative impact on multiples for the bank stocks on a medium to long term basis.
For Financial Professional Use Only. Not for use with the public.
The views expressed herein are those of investment professionals at Jennison Associates LLC (“Jennison”) at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. This commentary is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. This commentary does not constitute investment advice and should not be used as the basis for any investment decision. This commentary does not purport to provide any legal, tax, or accounting advice. PGIM Investments LLC is a registered investment advisor with the U.S. Securities and Exchange Commission.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.
Prudential Investment Management Services LLC is a Prudential Financial Company and a FINRA member firm. Jennison Associates and PGIM, Inc. (PGIM) are registered investment advisors and Prudential Financial companies. PGIM Quantitative Solutions is the primary business name of PGIM Quantitative Solutions LLC, a wholly owned subsidiary of PGIM. PGIM Fixed Income and PGIM Real Estate are units of PGIM. © 2023 Prudential Financial, Inc. and its related entities. Jennison Associates, Jennison, PGIM Real Estate, PGIM, and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
For compliance use only 1068485-00001-00