@ChpBstrd
Good summary. Your math is spot on. A few other dynamic items to consider in your analysis.
- The duration risk shrinks every month
- This panic is causing low risk bond rates to fall. If this holds through 3/31, the OCI losses shrink and the banks appear better capitalized (Other comprehensive income, the line item in the call report)
- The only way these unrealizes losses become realized is in a liquidity run. The combination of the fed facility and a better deposit base cushion most banks from this (and likely First Republic)
I'd love to see them do a press release and say what percentage of their depositors are insured vs. uninsured. The thing that's scary about FRC is doubling deposits in three years during the free money for all years of 2020-2021. How much of those are uninsured?
I think FRC has a valuable deposit and wealth management franchise that PNC / TFC / USB would buy. There's a price where it makes sense for those banks to raise their own capital and buyout FRC vs. an FDIC failure. That's why I'm betting on the preferreds. I want nothing to do with the common, but my bet is FRC survives or is bought vs. an FDIC failure.
I could be wrong
I too would like to see a press release about the % of uninsured assets. There's no rational incentive for a typical family to cash out their checking account, because it's FDIC insured, but mid-to-large size businesses with millions of dollars in payroll/AP accounts insured to 250k are a different story.
The later group is big enough to cause bank runs. It just won't look like a bunch of average joes forming a line. It'll look like a pattern of transfers done online and changes on quarterly reports. These online bank runs won't be publicized or visible to anyone for months, which makes it even scarier. CFOs have to wonder if their banks are already being eviscerated by other CFOs. Some must be thinking about setting aside some funds in treasuries or FDIC-insured hidey holes, just in case.
It seems unlikely to me that FRC's rapid increase in deposits came from a wave of small accounts. More likely, they offered some incentive to businesses and high net worth individuals to obtain those deposits. What kind of incentives? Maybe they went out on the risk/duration curve with their asset base so they could pay higher interest rates or hold fees lower than the competition? If so, that would make their duration risk profile worse than expected at the same time their deposits are more concentrated than average.
I am also interested in bank preferreds, but I think it might be too soon. During the April 2020 panic, preferred stock funds briefly yielded 7.5%. Those are the types of long-duration returns that would support a 4.5% - 5% WR if one could be patient enough and gutsy enough to lock them in. As it turned out, stimulus was announced, bank failures were taken off the table, and preferreds recovered almost completely before the brief recession was over.
The lesson learned was: Wait for the panic, and then lock in returns. The inverted yield curve means we can only do this with risk assets like corporate bonds or preferreds.
We are absolutely NOT at any kind of panic stage at the moment. To see what panic will look like, see what happens to investment grade bond yields versus treasury yields as shown in the graph below. Preferred stock yields will not be far behind these Baa bonds. Even after all the media noise about money fleeing to treasuries, the credit spread right now is actually tamer than in many less risky times. If a recession is on the way, as I think it is, history counsels us to expect the spread to rise at least another 1%. I'll start shopping for preferreds and corporate bonds in earnest when this Baa-treasury spread hits 3 or 3.5%.
In the meantime, I'll be nursing mild paper losses on some OZKAP, now yielding 7.27% and trading for $15.90. That's my price for getting in too soon!