The failures of Silicon Valley Bank and Signature Bank and the wind down of Silvergate Bank served as reminders of the importance of risk management in the banking industry, particularly in the areas of concentration, liquidity, and interest rate risk. Historically, concentration risk was usually focused on the loan portfolio in terms of asset classes or industry exposure. Following the bank failures, analysts and investors are now looking at metrics like percentage of uninsured deposits and average deposit account size to evaluate concentration risk in the deposit base and assess which other banks might be susceptible to sudden deposit outflows that could put the institution at risk. It's an appropriate time for bank management teams to speak to their approach to risk management and why the issues that led to the downfall of those banks won’t impact their institutions.
The topics of deposit flows and pricing continued to be the primary area of interest in many investor meetings during the first quarter. In terms of increases in deposit costs, analysts and investors will be interested in understanding if the higher costs are attributable to exception pricing offered to certain clients, across the board rate increases, clients shifting deposits into higher interest bearing accounts, and/or the addition of higher cost time deposits to offset outflows in other deposit categories. There will also be interest in the deposit trends that banks saw during the last few weeks of March after the news of the bank failures. Management teams should be prepared to speak to whether they saw any increase in deposit outflows, any adjustments they had to make in deposit pricing to retain deposits, or if they were able to take advantage of the turmoil to add clients who wanted to move their deposits to a larger, stronger institution.
During earnings calls in January, many banks indicated that they were taking a more conservative approach to new loan production given the macroeconomic uncertainty. Analysts and investors will be interested in hearing if there has been any change in the approach to new loan production, particularly if the pullback in lending by many banks has created opportunities to add new clients that still meet tighter pricing and underwriting criteria.
While most banks have generally indicated that they have yet to see any meaningful deterioration in credit quality, the concern around certain asset classes, particularly office CRE, continues to increase driven by anecdotal stories of large defaults on office CRE loans, as well as increasing vacancy rates, particularly in some large metro areas. Investors and analysts will be looking for more data around early warning signs of credit deterioration, particularly trends in watchlist and substandard loans. Banks should also be prepared to speak to their loan monitoring protocols and how frequently they are getting updated financial data from borrowers to inform their risk ratings and reserving.
Some banks have taken advantage of their strong capital positions to sell lower-yielding securities at a loss and reinvest the proceeds into higher-yielding securities that will contribute to higher net interest income at a time when loan growth is slowing and deposit costs are rising. Investors and analysts will be interested in hearing if those banks that have done some repositioning in their securities portfolio intend to do more, and if those that haven’t yet are considering it as an option and how they think about acceptable earnback periods.
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