Charles Schwab and State Street red flag

Author: Steve Tee

Investors and depositors are continuing to yank money out of low yielding banks and into higher yielding institutions or investment vehicles. Financial Times reported that a staggering amount of US$60B has been withdrawn from 3 US banks in the first quarter of 2023, namely Charles Schwab, State Street and M&T. Traditional banks are being challenges and put under pressure as competitors are releasing high return savings accounts, thanks to high interest rate in US. This will cause massive reallocation of resources (capital) and other banks that does not follow suit will be in big trouble.

We see Charles Schwab, State Street and M&T bank shares gap down on Monday and on Tuesday debounced. The question is, will this dip be temporary or the bottom has yet to set? One concern is with Charles Schwab, because their top investor just walks out the door on them. Reported by Financial Times, GQG Group offloaded US1.4B of shares in month of March, due to the banking turmoil and fear of contagion that could spill over.

Also reported by Financial Times, “At the end of the year, Schwab held a combined $330bn in mortgage-backed bonds, treasuries and debt securities. But the portfolio was worth $307bn when marked down to take account of the decline in bond prices, which have fallen as the Fed has raised rates.”. There is a big unrealized loss that could turn into a big disaster if commercial real estate sector gets hit hard coming Q3 2023. We already see Blackstone defaulting on their Nordic REIT bond and several others as well. Just in, real estate giant Brookfield Corp defaults on their second major office portfolio, reported by Forbes. This office building mortgage default amounts to US$161.4M according to Bloomberg, as high interest rates, high vacancy rates, hybrid/work-from-home preference and high borrowing cost continues.

The same article in Forbes also mentioned that, “Brookfield’s default in Los Angeles earlier this year marked one of the first major defaults among big-name real estate companies. Within weeks, Pacific Investment Management Co. also defaulted on $1.7 billion in office mortgages across major cities like Boston, New York and San Francisco, sending shockwaves through the commercial office industry. Five to 10 more office towers each month become at risk of defaulting because of low occupancy or maturing debt that would have to be refinanced at a higher rate, the Wall Street Journal reported in February.”