SA Asks: Is a new wave of bank failures looming on the horizon?

[JP Morgan Chase and Co]
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Last month, JPMorgan Chase (JPM [https://seekingalpha.com/symbol/JPM]) CEO Jamie Dimon warned that there could be a substantial number of credit "cockroaches" lurking in the banking sector, triggering concerns that another wave of bank failures could be looming on the horizon.

In a recent Seeking Alpha readers poll, 62.5% of respondents said they weren't worried that another crisis was brewing, while 37.5% said they were concerned.

[Seeking Alpha readers poll results on whether we could see a new wave of U.S. bank failures.]
Seeking Alpha readers poll on bank failure risk (Seeking Alpha)

We asked Seeking Alpha analysts Dividend Collection Agency [https://seekingalpha.com/author/dividend-collection-agency], Labutes IR [https://seekingalpha.com/author/labutes-ir], and Retired Investor [https://seekingalpha.com/author/retired-investor] whether they thought investors should brace themselves for another wave of bank failures.

Dividend Collection Agency [https://seekingalpha.com/author/dividend-collection-agency]: In the near term, I don’t believe we’ll see a new wave of bank failures. I think many learned from the Great Financial Crisis and the failure of Silicon Valley Bank in early 2023. As a result of tighter regulations, many strengthened their balance sheets.

However, with the recent labor market weakening, those with higher commercial real estate exposure could see bank runs should we experience a recession. And I do think a recession is likely in the next year or two.

Personally, I would recommend staying away from smaller banks with higher real estate exposure and instead focus on names like JPMorgan (JPM [https://seekingalpha.com/symbol/JPM]) due to their size and scale advantages. Currently, they’re fairly valued, in my opinion.

U.S. Bancorp (USB [https://seekingalpha.com/symbol/USB]) is also a good buy here from a valuation standpoint at roughly 10x earnings and more than a 4% yield. This is significantly higher than peers like Bank of America (BAC [https://seekingalpha.com/symbol/BAC]), Wells Fargo (WFC [https://seekingalpha.com/symbol/WFC]), and Citigroup (C [https://seekingalpha.com/symbol/C]), whose yields all sit around 2%.

Labutes IR [https://seekingalpha.com/author/labutes-ir]: Following the global financial crisis of 2008-2009, the banking sector has been operating with much higher levels of capital and liquidity and is therefore much better prepared for periods of crisis. Thus, I think a wave of bank failures in the near term is quite unlikely, especially among large banks like JPMorgan (JPM [https://seekingalpha.com/symbol/JPM]) that are well capitalized and hold good levels of liquidity.

Having said that, there are some pockets of risk in the sector, such as those related to commercial real estate or private credit, that may raise investor concerns in the near term.

Related to this, I see Deutsche Pfandbriefbank (OTCPK:PBBGF [https://seekingalpha.com/symbol/PBBGF]) as especially vulnerable due to its monoline business model exposure to commercial real estate loans, making it potentially the most likely bank to fail in Europe in the near term.

Retired Investor [https://seekingalpha.com/author/retired-investor]: Concerns of a pending recession had several of my readers stating they only hold preferred stocks issued by institutions classified as “too big to fail,” a term originating in the 1970s. This is understandable since over 500 banks, mostly community and smaller regional ones, collapsed during the 2008-2009 Great Financial Crisis. After the GFC, Congress passed the Dodd-Frank Act to strengthen the financial requirements of the biggest banks, thus hopefully preventing another GFC due to such failures.

If one does fail, preferred stockholders would be compensated before common stockholders, thus making them a safer investment for income seekers. That said, one still wants a strong issuer, one where the total common equity is at least 7X the par value of all the outstanding preferred stocks.

Issues like Citigroup Capital XIII TR PFD SECS (C.PR.N [https://seekingalpha.com/symbol/C.PR.N]), JPMorgan Chase & Co. 5.75% SHS PFD DD (JPM.PR.D [https://seekingalpha.com/symbol/JPM.PR.D]), or Morgan Stanley PFD A 1/1000 (MS.PR.A [https://seekingalpha.com/symbol/MS.PR.A]) look attractive at this time for issuers covered by the “too big to fail” rules.

* Top Financial Stocks [https://seekingalpha.com/screeners/96793115-Top-Financial-Stocks]

MORE ON JPMORGAN CHASE

* JPMorgan Chase & Co. (JPM) Presents at The BancAnalysts Association of Boston Conference Transcript [https://seekingalpha.com/article/4839263-jpmorgan-chase-and-co-jpm-presents-at-the-bancanalysts-association-of-boston-conference]
* JPMorgan Chase: High Asset Value Warning And Political Uncertainty Continues [https://seekingalpha.com/article/4831242-jpmorgan-chase-high-asset-value-warning-and-political-uncertainty-continues]
* JPMorgan Chase: Credit Risk, Bank Deregulation, And The Preferreds [https://seekingalpha.com/article/4831143-jpmorgan-chase-credit-risk-bank-deregulation-and-preferreds]
* Jamie Dimon says $20B bank loan for Argentina ‘may not be necessary’ - Reuters [https://seekingalpha.com/news/4516911-jamie-dimon-says-20b-bank-loan-for-argentina-may-not-be-necessary---reuters]
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