Raphael Stevens

After american regulators seized control of a collapsing Silicon Valley Bank (svb) last month, the fallout felt unpleasantly familiar. The biggest bank failure since 2008 was swiftly followed by others. Signature Bank, a lender in New York, fell two days later. Another week and fleeing investors had forced Credit Suisse, a 167-year-old Swiss bank, into a hasty tie-up with its rival ubs. Fifteen years ago a cascade of such failures prompted a global credit crunch, as financial institutions drastically tightened lending standards in an attempt to protect themselves, which was followed by the worst downturn in generations. Was a repeat under way?A month on, the answer appears to be a merciful “no”—or, at least, a “not yet”. Investors are shunning bank shares. Those of some regional American lenders have been brutalised: one, First Republic, has seen its stock price plunge by more than 90% since February. For six days after svb’s collapse the bond market was effectively shut, with no new bonds issued by American firms.Then, in the second half of March, the shutters reopened and both borrowers and lenders rushed back in. All told, investment-grade issuers sold $103bn of debt in March—around the monthly average for 2022, despite the week-long hiatus. For such issuers, yields have fallen, and “the market’s wide open”, says Lotfi Karoui of Goldman Sachs, a bank. “The market really hasn’t embraced the idea that [the events of March] will morph into a financial crisis.” By the end of the month, even the riskiest junk issuers were once again able to raise new debt. Yet even if the risk of a credit crisis seems to have passed, borrowers still face a squeeze. The most obvious source of pressure is the Federal Reserve, which since March last year has raised its interest rate from close to zero to between 4.75% and 5%. For the firms that have borrowed $1.5trn in loans, which tend to have floating interest rates, the increase has quickly translated to higher debt-servicing costs. But for issuers of high-yield bonds, who have borrowed a similar amount and tend to pay fixed interest coupons that only rise when the bond is refinanced, the full effect of higher rates is yet to be felt. Although the market expects rates to be cut by a percentage point this year, the Fed’s governors project an end-of-year rate of above 5%. The further the threat of a financial crisis fades, the more likely the Fed’s forecast is to prove correct.Meanwhile, banks were reluctant to lend even before svb fell. Mike Scott of Man Group, an asset manager, notes that by the end of 2022 surveys already showed lending standards had tightened to levels that, in previous business cycles, preceded recessions. The ructions of last month, which in America were focused on small and medium-sized regional banks, are likely to have turned the screw still further. Analysts at Goldman Sachs estimate that banks with less than $250bn in assets account for 50% of commercial and industrial lending, and 45% for consumers. For small firms employing 100 people or fewer, the figure rises to 70%. It is these businesses—which employ more than a third of America’s private-sector staff and produce a quarter of its gross output—that will be most sensitive to the forthcoming credit squeeze. Peter Harvey of Schroders, another asset manager, predicts that the outcome will be “stronger covenants, higher [interest] spreads, lower issuance volumes, smaller borrowing sizes and tighter controls on lenders’ sectoral exposure”.The final source of stress will be firms’ own liquidity, which has deteriorated markedly over the past 12 months. After covid-19 struck, corporate borrowers accumulated huge cash buffers, aided by rock-bottom interest rates and floods of newly created money from central banks. In 2020 the median American investment-grade firm held cash worth 6.5% of its assets, more than at any time in the last 30 years. This figure has since been eroded to 4.5%, or around the same level as in 2010 following the global financial crisis. As a result, firms now have less scope to run down their existing cash reserves if interest rates stay high, and are more likely to need to borrow in response to future shocks. The banking industry’s March madness might not have triggered a repeat of 2008. Life for borrowers is nevertheless getting more and more uncomfortable. ■ More

Pipettes are seen at the Moderna Therapeutics Inc. lab in Cambridge, Massachusetts, U.S., on Tuesday, Nov. 14, 2017. Moderna this week started testing
Adam Glanzman | Bloomberg | Getty Images

Check out the companies making headlines in midday trading.
WW International – Shares of the WeightWatchers parent surged 48%. Goldman Sachs upgraded the diet company to a buy from neutral rating late Monday, saying shares could more than triple as WW International pushes into the obesity medication market.

CarMax — The car retailer’s shares jumped 10% after it announced a beat on its earnings for the fourth quarter. CarMax posted earnings of 44 cents per share, while analysts polled by Refinitiv had anticipated 24 cents per share. Meanwhile, the company’s revenue of $5.72 billion missed analysts’ estimates of $6.04 billion.
Mohawk Industries — Shares of the flooring manufacturer gained 5% after Loop Capital upgraded the company to buy from its previous hold rating. The firm maintained its price target of $115, which suggests Mohawk could gain 21.4% since Monday’s close.
Moderna – The biotech stock lost about 4% after the company said that its flu vaccine trial fell short of the criteria for early success in a late-stage trial. There weren’t enough cases of infection among the people who received the shot, the company said.
Tesla — Elon Musk’s electric vehicle maker gained 1% in midday trading Tuesday. The company implemented a slew of new price cuts on its website on Friday, which pushed shares lower on Monday. The cuts range from 2% to nearly 6% for U.S. vehicles, and is the fifth price cut for the EV maker. Tougher standards to qualify electric vehicles for a $7,500 tax credit has also caused some concern for the company.
WisdomTree — Shares of the financial firm gained 3% after the company said it had $1.9 billion of net flows in March. The company now has more than $90.7 billion in total assets under management.

New York Community Bancorp — Shares of the regional bank gained 2.7% after Jefferies upgraded the stock to buy from hold. The investment firm said NYCB’s move to acquire parts of Signature Bank strengthened its balance sheet.
Whirlpool – Shares of the kitchen and laundry company rose more than 4% midday after Goldman Sachs upgraded the stock to buy from neutral, citing its valuation. The firm said channel checks show promotions in March in North America have stabilized and that that could support pricing and drive profitability.
Akamai Technologies – Shares added 2.6% the day after Piper Sandler analyst James Fish upgraded Akamai to overweight from neutral. The analyst said the recent fall in the cloud stock, which is down 5% this year, “presents an opportunity to own this contrarian name.”
LendingClub — The lending stock gained 5% after JPMorgan initiated coverage of the stock at overweight. The firm said the stock may be oversold with investors skittish about balance sheets and the potential for a recession. 
Murphy Oil — The natural gas company’s shares gained 2.6% after Truist upgraded shares to buy from hold. The firm also raised its price target on the stock to $56 from $49, which implies about 45% upside from Monday’s close price.
— CNBC’s Alex Harring, Tanaya Macheel, Sarah Min, Samantha Subin, Brian Evans, Jesse Pound and Pia Singh contributed reporting More

Banks are facing higher costs and losses on some assets, putting them in a “more precarious situation” and potentially leading to a pull-back in lending, IMF Chief Economist Pierre-Olivier Gourinchas told CNBC.
Significant further tightening of lending is a risk to its 2.8% global growth forecast, he said, taking it to 2.5% or even 1% in a severe downside scenario.
However central banks and financial authorities have shown they have the tools to address pockets of instability, he added, and should remain focused on bringing down inflation.

Interest rate rises have increased banks’ vulnerabilities — and their response presents a significant risk to global growth, the International Monetary Fund’s chief economist warned Tuesday.
“We are concerned about what we have seen in the banking sector, particularly in the U.S. but maybe also in other countries, might do to growth in 2023,” Pierre-Olivier Gourinchas told CNBC’s Joumanna Bercetche in Washington, D.C.

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Central bank hikes have increased funding costs for banks, while lenders have also seen some losses in assets like long-term bonds.
“Banks are in a more precarious situation. They have healthy cushions, but it’s certainly going to lead them to be a little bit more prudent and maybe cut down lending somewhat,” Gourinchas said.
In one scenario, the IMF sees funding conditions for banks tightening further and squeezing lending, bringing its forecast of 2.8% global growth in 2023 down to 2.5%.
Gourinchas said its models had also forecast a more adverse scenario where financial stability is not contained.

“That would lead to massive capital flows from the rest of the world trying to go back to safety, going to U.S. Treasurys, dollar appreciation, increasing risk premia, loss of confidence,” he said. In this scenario, the IMF sees the world economy growing at about 1% for this year. But the likelihood of this is comparatively low, Gourinchas noted, at about 15%.

The IMF on Tuesday released its latest global growth report, which contained its weakest medium-term growth expectations for more than 30 years.
Financial stability has been in the spotlight in recent months, amid the collapse of several U.S. banks, the swift sale of Credit Suisse in Europe, and turmoil in the U.K. bond market that nearly toppled pension funds last fall.
Gourinchas told CNBC that the debate around central bank rate hikes had shifted from growth versus inflation to financial stability versus inflation.
He said central banks and financial authorities have shown they have the tools to address pockets of instability, for example U.S. regulators guaranteeing deposits for Silicon Valley Bank customers and Bank of England gilt purchases. “Monetary policy should stay focused on bringing inflation down, that’s our recommendation at this point,” Gourinchas concluded. More

The countdown is on. Earnings season is set to kick off Friday with the banks, one of ours among them. The whole sector came under heavy pressure last month after the collapse of Silicon Valley Bank. How the banks deliver could set the market tone in the coming weeks. Much of this mini-banking crisis ties back to the Federal Reserve’s war on inflation, with the rapid rise in interest rates pressuring loan values and increasing competition for deposits. Central bankers are not solely at fault for what happened at SVB on March 10 as management there was clearly out to lunch. But many economists feel the Fed does share some blame for keeping money so cheap for so long coming out of the Covid pandemic and subsequently having little choice but to hike interest rates at a breakneck speed to thwart spiraling prices. Currently, another quarter-point rate hike is widely expected at the Fed’s May meeting. However, there’s a growing minority who believe the recent banking stumbles should keep the Fed on hold. Jim said Monday that such a pause could spark a big stock market rally while keeping rates high enough for banks to make money. But, first things first. Ahead of Friday’s bank reports, which include first-quarter numbers from Club holding Wells Fargo (WFC), we’re watching three main things: the mix of deposits and loans and the resulting money made on the difference in the form of net interest margin (NIM). How these dynamics play out will factor into the Fed’s next rate move — and as a result, market sentiment. Deposits The chilling effect of the Silicon Valley Bank failure has been palpable. As highlighted by Jim Cramer in his Sunday column , total U.S. commercial banking deposits dropped by nearly $65 billion on a seasonally adjusted basis for the week ended March 29 , nearly three weeks out from SVB’s failure. That’s 10 straight weekly declines , according to bank assets and liabilities data from the Fed. It’s a harsh reminder that accounts in excess of $250,000 are not protected by the FDIC (Federal Deposit Insurance Corporation). Not to mention, withdrawing money without warning has never been as frictionless as it is today — thanks to online and mobile banking. (It’s worth noting the government has backed all deposits at failed banks and has said it stands ready to help elsewhere if needed.) Since deposit levels directly contribute to a bank’s ability to make loans, it’s not surprising that commercial bank lending declined in recent weeks. While the roughly $45 billion drop for the week ended March 29 was less than the $60 billion decline the prior week, it was still indicative of financial tightening. Focusing on deposits at the major banks when they issue their quarters — specifically Wells Fargo, which we think is reasonable to believe saw inflows during the tumult— will signal their overall health and whether they’re in a position to ease up or lock down lending standards. Lending As a result of the sub-optimal deposit situation, lending is taking a hit because banks must maintain certain capital levels. To put a finer point on the bank lending slowdown, Bloomberg looked at the roughly $105 billion decline from the week ended March 15 to March 29 and found it was the largest two-week drop since the central bank started tracking these figures in 1973. That’s a double-edged sword. If money is harder to come by, then anything purchased with a loan such as a car or a home is going to see demand fall. That, in turn, can put pressure on the broader U.S. economy, two-thirds of which is fueled by consumer spending. Again, it’s the kind of slowdown the Fed has been trying to engineer but not at the expense of further hurting the banks just as the sector started to find its footing since the SVB-driven debacle. It could be that we’ve seen all the financial institution tightening that we need to see given that on a seasonally adjusted basis, the average residual (assets minus liabilities) across all U.S. commercial banks in March is on par with the average we saw in February before SVB blew up. However, that’s going to depend largely on deposit dynamics, which rely on confidence in the banking system and how competitive savings account rates are in comparison to high-yielding short-term CDs, money markets or Treasurys. Net interest margin The difference between what a bank pays depositors in interest compared to what they charge customers for loans determines its net interest margin, also known as NIM. Banks generate interest income by borrowing at a lower rate (think deposits/liabilities) and lending at a higher rate (think home mortgages/assets). They have the flexibility to some extent, based on market forces, to tweak that equation. They could always incentivize deposits by raising the rates they’re willing to pay account holders to prevent them from bolting. But in doing so they would have to accept a smaller profit. Wall Street hates that. On the flip side, to protect NIM and net interest income (NII) in a tighter banking environment, financial institutions may have to keep deposit rates relatively low versus alternatives — which means deposits are harder to come by — or raise the rates they charge on loans, making them less affordable and negatively impacting demand for the goods purchased with those loans. Bottom line This is obviously a tough setup for the banks and makes them difficult to invest in. As a result, the reason we are in Wells Fargo has less to do with the operating environment and more to do with it being a self-help story with turnaround catalysts in the form of achieving regulatory milestones. To be sure, Wells is a traditional bank that must deal with short-term deposit and lending gyrations. But we think it’s pretty solid from the deposit side — and by virtue of its higher capital controls, it can’t go crazy giving out loans. As for Club holding Morgan Stanley (MS), which reports its quarter next week, we value management’s focus on fee-based wealth management revenue and investment banking operations. Given this setup, we are comfortable with our slightly greater than 7% cash position in the Club portfolio, believing that a Fed pause would cause a rally. On the other hand, a more dogmatic Fed would prove harsh for the market overall but benefit the tech sector, which is still working through cost cuts and can put still put out growth against a slowing economy. Once again, it comes down to owning a diversified portfolio that provides areas to book profits and buy into weakness no matter the market environment. (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

People walk past a Wells Fargo branch on January 10, 2023 in New York City.
Leonardo Munoz | View Press | Corbis News | Getty Images

The countdown is on. Earnings season is set to kick off Friday with the banks, one of ours among them. The whole sector came under heavy pressure last month after the collapse of Silicon Valley Bank. How the banks deliver could set the market tone in the coming weeks. More