Credit access ‘will get worse’ for consumers following SVB collapse: Analyst

CFRA Research Equity Analyst Alexander Yokum joins Yahoo Finance Live to discuss consumer concerns over the availability of credit following the collapse of Silicon Valley Bank.

Video Transcript

SEANA SMITH: Americans are growing concerned about access to credit and lending conditions amid higher rates and the banking crisis. A recent survey from the New York Fed finding about 50% of Americans say credit is much or somewhat harder to get than a year ago. 53% expect credit to be more difficult to get a year from now. Our own Jennifer Schonberger spoke with New York Fed President John Williams about current lending conditions, more specifically what we are seeing from the banks and the risk of a credit crunch earlier today. Let's listen to what he had to say.

JOHN WILLIAMS: I think it's important to separate some of the credit availability from banks, because the issues we've seen are really in a few banks, from broader financial conditions.

This is something that I and many others are watching very closely. So right now, it's still pretty early days in terms of seeing clear signs of changes in credit conditions and credit availability. I'll be watching that closely to see those signs and then see any broader effects on consumer spending, business spending, and other parts of our economy.

SEANA SMITH: Joining me now is Alexander Yokum, CFRA Research Equity Analyst. Alexander, it's great to see you here. So we just heard Williams saying that at least for now there's no clear signs of a credit crunch following the collapse of SVB. Do you agree?

ALEXANDER YOKUM: Not exactly. I'm a little bit concerned. I think there were already concerns coming into 2023 that loan growth would slow, that access to credit would come down. And the way I see it is following what happened in March with Silicon Valley Bank, it will likely get worse.

What you have to remember is before this, banks had excess deposits. So they were happy to give out loans. But given the contraction in deposit balances, I'm expecting banks to be a little bit more conservative with their loans. And I would see that even more in the regional banks than the large banks.

And that is because they have less excess deposits. So regional banks on average have about 85% loan to deposit ratio versus large banks at about 60%. So when there's concerns about deposits, it would be more likely that they would cut back a little bit more than large banks.

SEANA SMITH: Alexander, when it comes to loans, I guess how big of a slowdown, if you can quantify that for us, do you think maybe we could potentially see, not only within this earnings report, earnings season that's coming up here later this week, but also looking ahead to the current quarter right now?

ALEXANDER YOKUM: Yeah. So for the current quarter, I wouldn't be as concerned. And that is just because if you recall, this happened in March, so two out of three months will probably still be status quo. But going forward, a little bit concerned.

You know, typically, we look at average loan balances just to get rid of the noise, but this quarter especially, I think looking at the difference between average and period end, balances will be pretty interesting. But like I said, I would expect more contraction from the smaller banks, especially banks that have seen deposit runoff. That would be where I would expect a majority of the contraction.

SEANA SMITH: Alexander, when it comes to deposit flows here, are you expecting, I guess, outflows across all of your coverage? Because you cover a number of regional banks-- some are at risk, but some who you say are pretty well positioned for right now.

ALEXANDER YOKUM: Yeah. Definitely a majority, I do expect deposit outflows. The question is, how much? If you think about how much the stocks that have fallen in price, a 1% or 2% drop in deposits I would consider actually a positive. I'm expecting more about a 3% or 4% on average, but I definitely wouldn't expect that to be uniform. Obviously, companies like First Republic will likely see far greater than that in terms of outflows.

And then banks with less uninsured deposits are also in good shape-- less wealthy clients, more diversified, smaller account balances, that type of deal. But you know, I do expect most banks to have deposit outflows. But like I said, a 1% or 2% I wouldn't consider too dangerous.

SEANA SMITH: Alexander, you mentioned First Republic, so let's talk about it there, because we did get the news earlier this week that's going to stop paying dividends on its preferred stock. What do you think is ahead here for this bank? Is it going to be able to find a buyer or is it going to be a standalone company here going forward?

ALEXANDER YOKUM: Yeah, I guess right now, it is a little bit tough to say. I wouldn't bet on a buyer right now. My expectation is that it'll probably just become a smaller version of its previous self. We've already got headlines that they're losing wealth advisors and some of their top talent is leaving. So that's a concern.

Their borrowing costs have skyrocketed, so their profit is likely going to be squeezed pretty significantly. I mean, it has been interesting if you think about the crisis, there was a lot of concern in early March. But since then, it's calmed down. A lot of the volatility has gone away.

But you'll notice a lot of these banks haven't actually bounced back in terms of their price. And I do think that's because there are concerns about a permanent decrease in profitability, especially for a bank like First Republic.

SEANA SMITH: Alexander, switching gears here a little bit and talking about some of the banks that you think are better positioned for this time. One of the banks that you have a buy rating on is Fifth Third Bancorp. Why are they better positioned and what are you expecting to hear from them?

ALEXANDER YOKUM: Yeah. So Fifth Third was actually a bank that I was neutral on coming into this crisis, just because their growth was a little bit lackluster. It wasn't necessarily better than the industry as a whole. That being said, they've fallen pretty significantly in price, and now I see a lot more value there.

They're very well diversified between consumer and commercial clients. They don't cater to the VCs and the venture capital of the world as much as the Silicon Valley Bank, or Signature, or anything like that. And generally, just not as wealthy clients, less uninsured deposits. So I'm expecting less concern in terms of deposit flight, which hopefully will translate to lower funding costs than potentially some peers that have significant deposit outflows and have to increase the rate they pay on deposits.

SEANA SMITH: All right, well, we'll start hearing from some of these regionals later this week. Alexander Yokum of CFRA, always great to speak with you. Thanks so much.

ALEXANDER YOKUM: Thank you.