By Brian Graham and Jared Dallas
Banking industry results for the first quarter of 2023 held few surprises.
Despite perceived regulatory reluctance to approve larger bank mergers, the steady pace of consolidation in the industry continues in response to growing fixed costs from technology and regulation.
The industry continues to be under the same stresses that have triggered recent bank failures:
With interest rates higher compared to the end of 2023, unrealized losses on bonds and loans increased correspondingly to approximately $829 billion industry-wide (34% of bank regulatory capital).
Early warning signs of credit stress in a number of CRE sectors continued to build while actual losses remain muted so far.
These stresses are not evenly distributed, with some banks quite well positioned and others under material stress.
On the bright side, the vast majority of banks appear to be well positioned to handle these stresses. And, while many weaker banks need capital infusions, few banks appear to be at risk of near-term failure.
For banks in a weaker position, the answers boil down to a simple choice among three alternatives:
Hunker down, reducing lending to husband capital and slogging through a difficult number of years. Many refer to banks that chose this path as “zombie banks”. We can already see evidence of this in the subdued loan growth rate for the industry as a whole.
Raise private capital on a stand-alone basis to fill holes in balance sheets and reposition for success once again.
Sell to or merge with a better positioned bank to capture economies of scale.
Photo by Alex wong
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