Following the recent sharp drop in ’ share price driven by loan loss provisions, there’s been a lot of discussion about the bank. One notable conversation on Bloomberg TV featured the Head of Strategy at a large asset manager and the Head of Research at a major investment bank. Their key takeaway was that the selloff was a knee-jerk reaction because market participants don’t track this bank regularly. However, those who follow Zions closely, they argued, know its fundamentals are rock-solid: pristine risk management and underwriting, a comfortable liquidity position, and an excellent, decades-long business model.
We usually don’t comment on share-price moves; our banking work focuses on fundamentals and resilience to crisis events. That said, in this case the commentators were opining on fundamentals – so we took a quick look at Zions. Our review suggests their claims are far from reality.
First, Zions has significant exposure to CRE (Commercial Real Estate). According to a Florida Atlantic University screener, its CRE loans-to-equity ratio is the 23rd highest in the sector at 388.5%. Having a single lending segment at nearly 4× equity is hard to reconcile with “pristine risk management,” even if current asset quality metrics look acceptable. This is CRE, a segment where, based on studies we discussed in a previous article, as many as a third of loans could default in the next 2-3 years. Importantly, those estimates assume today’s macro environment persists without negative shocks. Given that outlook, even banks with CRE loans-to-equity of 150–200% could be at risk of going underwater. Calling a bank with a 388.5% ratio “an excellent business model” is, to us, baffling and irresponsible.
Second, Zions has a high share of uninsured deposits. If you follow our work, you know we take a cautious view of the FDIC’s ability to handle stress scenarios. Uninsured deposits equal 152% of Zions’ liquid assets. In other words, the bank could face failure even in a non-crisis environment because it lacks sufficient liquidity to cover uninsured deposits – deposits that, as the SVB collapse showed, can flee in a day. In fact, another quarter of elevated provisions could trigger a rapid run of uninsured deposits. This is not what we’d call “a comfortable liquidity position.”
There are other major issues on Zions’ balance sheet, including its large commercial loan book and funding structure. But the two problems above alone suggest those experts’ views are, to put it mildly, not very accurate.
Why are these experts so far from reality? We believe conflicts of interest play a role. Analysts at large investment banks and rating agencies often can’t speak negatively about banks without jeopardizing potential or existing investment-banking relationships. Tellingly, this week Andrew Bailey, the Bank of England Governor, warned that recent developments in US private credit markets bear worrying echoes of the subprime mortgage crisis that triggered the GFC. He also highlighted the role of analysts and rating agencies:
“I sat in a session with people from the private equity and private credit world some months ago who of course told me everything was fine in their world, apart from the role of the ratings agencies, and I said: ‘We’re not playing that movie again are we?’”
He was likely comparing the lax stance of analysts and rating agencies before the GFC with the fact that Tricolor, which recently collapsed, had received a AAA rating from a major agency.
We’ve said this before, but it bears repeating: opinions from investment banks and rating agencies should be taken with a very large grain of salt – especially now, as financial metrics are deteriorating quite rapidly.
Bottom line
Believe it or not, there are more major issues on the larger bank balance sheets as compared to smaller banks, which we have covered in past articles. Moreover, consider that there was one major issue which caused the GFC back in 2008, whereas today, we currently have many more large issues on bank balance sheets. These risk factors include major issues in commercial real estate, rising risks in consumer debt (approaching 2007 levels), underwater long-term securities, over-the-counter derivatives, high-risk shadow banking (the lending for which has exploded), and elevated default risk in commercial and industrial (C&I) lending. So, in our opinion, the current banking environment presents even greater risks than what we have seen during the 2008 GFC.
Almost all the banks that we have recommended are community banks, which do not have any of the issues we have been outlining over the last several years. Of course, we’re not saying that all community banks are good. There are a lot of small community banks that are much weaker than larger banks. That’s why it’s absolutely imperative to engage in a thorough due diligence to find a safer bank for your hard-earned money. And what we have found is that there are still some very solid and safe community banks with conservative business models.
So, I want to take this opportunity to remind you that we have reviewed many larger banks in our articles. But I must warn you: The substance of that analysis is not looking too good for the future of the larger banks in the United States, and you can read about them in the prior articles we have written.
Moreover, if you believe that the banking issues have been addressed, I think that New York Community Bank is reminding us that we have likely only seen the tip of the iceberg. We were also able to identify the exact reasons in an article which caused SVB to fail. And I can assure you that they have not been resolved. It’s now only a matter of time before the rest of the market begins to take notice. By then, it will likely be too late for many bank deposit holders.
At the end of the day, we’re speaking of protecting your hard-earned money. Therefore, it behooves you to engage in due diligence regarding the banks which currently house your money.
You have a responsibility to yourself and your family to make sure your money resides in only the safest of institutions. And if you’re relying on the FDIC, I suggest you read our prior articles, which outline why such reliance will not be as prudent as you may believe in the coming years, with one of the main reasons being the banking industry’s desired move towards bail-ins. (And, if you do not know what a bail-in is, I suggest you read our prior articles.)