Investor fears tied to the fact 'we haven't seen a classic bank run' in a long time: Analyst

Janney Montgomery Scott Managing Director Timothy Coffey, who is also the Associate Director of Depository Research, joins Yahoo Finance Live to discuss the current regional banking crisis.

Video transcript

- Regional banks are selling off once again today as investors worry about another potential bank failure. The move lower coming despite comments that we heard from Fed Chair Jay Powell yesterday in his efforts to calm banking sector jitters.

JAY POWELL: The US banking system is sound and resilient. We will continue to monitor conditions in the sector. I think that the resolution and sale of First Republic kind of draws a line under that period of-- is an important step toward drawing a line under that period of severe stress.

- It's not helping things today. We want to bring in Tim Coffey, Janney Montgomery Scott associate director of depository research. Tim, it's great to see you here. So, of course, the big news today that's leading the declines is Pac West coming out, saying that it is exploring strategic options. You also have Western Alliance off more than 30% today. You've reiterated buys on both of those banks. Why?

TIMOTHY COFFEY: We did. Well, we think there's a disconnect between the stocks and the underlying companies right now. So last night, both companies came out and said deposits are stable and growing. Capital is growing. Those are both really good things because they show the strength of both institutions. But there's stuff happening in the market right now on their equities that leave people to get the impression that maybe they're not so good when really what's happening is they're good.

So what we're seeing is lots of put activity right now, which is depressing the stock prices, lots of trading in the aftermarket hours, which is typically a very thinly traded market to begin with. And then, of course, you've got what's already happened with First Republic and Silicon Valley Bank. And that's giving people the jitters. And I think that as kind of investors, especially in the bank space, there needs to be a separation between church and state. The stock is not the depositors. And the depositors do not reflect the stock price.

- So how do investors kind of wade through that? I mean, when you think about where things are, to your point, everything's kind of getting lumped in. You look at the regional bank ETF. I mean, that was down about 5% today. Certainly not the kind of bloodbath we saw earlier this week. But investors are looking at every one of these regional banks saying, who's going to be next? So how did they differentiate that?

TIMOTHY COFFEY: Well, you need to consult the disclosures that the companies are putting out. And they're putting out a lot of disclosures. We've got call reports, earnings releases, 10-K's is 10-Q's. Right now, we're getting mid-quarter updates where, basically, every two weeks some banks are telling us what their deposit flows look like. And you have to analyze those. You actually have to read them. So at Western Alliance, for instance, deposits are going up. The problematic depository customers in the technology sector that they experienced in March, they're bringing deposits back. They're up about $400 million since March 20.

You're seeing more borrowings and more on-balance sheet liquidity within the entire banking sector. You're seeing more cash on balance sheet. You're seeing deposit costs starting to go up. And so what we actually have across the industry is a banking industry that is more liquid and more attentive to customer demands when it comes to deposit cost. In a lot of ways, banks are safer right now than they were at the beginning of the year. But it's hard to really kind of acknowledge that reality when you've got declining share prices on the screen every day.

- Tim, why do you think Pac West and Western Alliance are being targeted so specifically?

TIMOTHY COFFEY: Because they're the last of the four from the Silicon Valley Bank closure. Silicon Valley Bank obviously had exposure to the VC and private equity industry. So did First Republic through their high-net worth business model. But Western Alliance has a small subsidiary in Silicon Valley. And Pac West was also doing business in that same area-- industry, rather.

And so when you saw the run of deposits at Silicon Valley Bank, close the bank. That's how severe it was. Same thing happened at First Republic. And they had to do the resolution with JPMorgan stepping in. And then you saw also deposit declines at Western Alliance and Pac West. I think it's interesting that you're not seeing this in other parts of the country. It was very abrupt, very quick deposit runs on four institutions, all around the Silicon Valley area. You're not seeing this in other parts of the country.

- Going back to Western Alliance and Pac West, I mean, you just pointed to the numbers that we've gotten from the company. I mean, things may look fine now. But isn't the fear, at least among investors in the market, that things could really change on a dime? Some would argue that SVB wasn't necessarily in a bad position, but because of digital banking, because depositors could get to it so quickly, things really accelerated very quickly. Isn't that the larger fear?

TIMOTHY COFFEY: Well, I think the larger fear is we just haven't seen a classic bank run in a while. And that's what happened at Silicon Valley Bank. Yeah, it was done in unique ways and in a very modern way, but that's all it was. And we're not seeing that, say, out of Western Alliance. What's happening at Western Alliance is their deposits are actually increasing. They're on target to grow deposits by 2 billion this quarter. They've increased the percentage of insured deposits to the point that if they were among the group of 50 largest banks in this country, they would be in the top decile in terms of insured deposits.

And on the uninsured deposits, they've tapped enough liquidity to cover that amount by almost 170%. So I get that there's this perception of fear because we've already seen three banks closed. One decided to close down itself. But the reality of the situation, the fundamentals and the information we're getting from the companies, like Western Alliance, is that that's just not the case. These are much better institutions than the stock prices suggest.

- But, Tim, there certainly is a lot of fear out there among investors. What is the risk or the likelihood maybe that another bank will fail, even outside of Pac West and Western Alliance, if you think those business models, those fundamentals are still strong.

TIMOTHY COFFEY: Well, I think across the industry, we're going to have losses in the bank sector, losses on credit, not necessarily banks because, one, we've got more capital in the industry than we have in the last 15 years. Banks have been lending with lower leverage than they have in the last 15 years. So, for instance, commercial real estate. It's not unusual to see loan to values in the 50% to 60% range, whereas 15 years ago, it might have been in the 80% range. So banks have a much bigger capacity to withstand losses. The things that we've seen so far have been liquidity related, customer related, where two institutions specifically have lost the confidence of their customers. We haven't seen that broad based.

- Tim Coffey with Janney Montgomery Scott, appreciate your time today. Good to talk to you.