The recent failure of two banks, Silicon Valley Bank in California and Signature Bank in New York, didn’t have much of a negative effect on the stock market overall. Yes, bank stocks slid a bit, and were rattled a little more a few days later when Credit Suisse was merged with UBS to stave off a large European bank failure.
Most likely, the market reaction would have been more negative had the administration not said it would cover all depositor losses even if over the FDIC limit. While that was not unprecedented, it does set an expectation going forward, which could become very problematic. Not surprisingly bank stocks, especially the small and regional bank stocks, have taken a hit, but also less than one would have expected had the administration not intervened to cover all deposits.
While there is an impact overall in the banking industry, it’s interesting to note that big national banks, including JPMorgan, Citigroup and Wells Fargo, just reported increased profits and increases in deposits for the first quarter. JPMorgan reported a 52 percent increase in profit, and estimates it picked up an additional $50 billion in deposits following the March bank failures. Citigroup estimates it netted almost $30 billion in new deposits since March. The banks expect to see moderate declines in deposits, as they compete with each other and smaller/regional banks in the coming months. In addition, some money will move to Treasuries and money-market funds that may offer higher interest. These deposit increases came at the expense of the smaller/regional banks, with customers moving their accounts to larger “to big to fail” institutions.
This increase in deposits has also helped the big banks profit. The Fed increasing interest rates allows the banks to increase the rate they charge for loans, but the view from depositors as a safe haven means they don’t have to increase their deposit rates. Smaller and regional banks don’t have that luxury right now, putting them under additional pressure. Regardless, clients of all sizes are pulling back. Banks are reporting mortgage underwriting has fallen off significantly because of the run up in interest rates. The same goes for investment banking and M&A (mergers and acquisitions).
Still, the big three banks are bulking up their reserves. It’s reported these banks have set aside an additional $2 billion to cover potential bad debts, and Wells Fargo’s CFO is quoted as saying the company expects to see more stress in the coming months. First quarter earnings reports will be coming out shortly, and they will tell a very important story on the strength of the economy and projections for the rest of 2023.
What does this mean for the independent bicycle dealer? Frankly, not much from an investment standpoint, as most probably don’t have a lot of bank stocks in their portfolios. In addition, most IBDs likely aren’t customers of large national banks, more likely to be dealing with smaller regional banks. The bigger concern is the impact on credit availability and interest rates available from the smaller banks. As noted above, the big banks are increasing their “bad debt” reserves, seeing decreasing demand in credit requests, and raising the interest rates on loans commensurate with rates set by the Fed. No doubt smaller banks are doing the same.
The increase in reserves suggests the banks anticipate businesses overall to either fall behind in payments, look to renegotiate current credit facilities, or enter bankruptcy. The interest rate increases further add to those possibilities.
Each of these alternatives may be something your business will face. Financing your business, the inventory, operating expenses, and the kind and amount of credit you offer your customers, are tough enough to manage in good times. Today’s uncertain economic outlook makes those things more critical.
While a credit crunch may have a significant impact on your business, it may also cause the same issues upstream with your suppliers and brands. Will they be able to offer you the same payment terms they have in the past? Will they get squeezed by their lenders to scale back on inventory or operations? Will they force liquidation of inventory at distressed prices to generate quick cash, and possibly distort the retail market with unsustainable discounts? Will they look for new outlets for their products that could bypass your business?
There are no easy answers to these questions. Your approach to deal with these will undoubtedly focus on the short term to make sure you can open the doors tomorrow. But you also have to consider the longer-term consequences to make sure you’ll be able to keep the doors open into the future.
The next installment in this series will discuss how the economy may impact your business and what strategies might help.
Contact Steve Bina: firstname.lastname@example.org