In the wake of the collapse of Silicon Valley Bank, financial stocks are under pressure as the market assesses the ongoing fallout and impact on regional lenders. But we remain confident in our two bank holdings and think Morgan Stanley (MS) – down around 8% over the past three trading sessions – is now a buy. “Morgan Stanley’s a buy…[it’s] a winner in this scenario , not a loser,” Jim Cramer said Monday. Conversely, it’s too soon to step in and buy Wells Fargo (WFC) on weakness, largely because the stock could see more of a sell-off if investors fear further contagion in the banking sector. Unlike Wells Fargo, Morgan Stanley’s business model doesn’t really depend on collecting deposits and issuing loans, which is the bread and butter of conventional banking. Instead, the firm’s multiyear pivot toward asset management provides stability to earnings and decreases its reliance on volatile investment banking revenues. Our approach to Wells Fargo — which, like SVB, is a deposit-oriented bank — is rooted in patience. We own a large position already, and want to wait to see if more conventional banks face problems in the coming days, which could trigger further selling in the banking sector and Wells Fargo by association. “We think we own the best with Morgan Stanley and Wells Fargo,” Jim said. MS YTD mountain Morgan Stanley’s stock performance year to date. Big picture Bank stocks fell Monday, one day after U.S. regulators announced a series of actions meant to shore up confidence in the nation’s financial system following SVB’s swift collapse late last week. Those interventions included granting depositors at SVB and crypto-focused Signature Bank — which regulators shut down over the weekend — full access to their funds stored at those two institutions. The Federal Reserve also disclosed a new program for other banks, giving them easier access to one-year loans to ensure they’re able to keep serving depositors. Shares of Wells Fargo closed down more than 7% Monday, at $38.41 apiece, while Morgan Stanley stock closed down more than 2%, at $87.99 a share. Financials were the worst-performing sector in the S & P 500 , falling more than 2% compared with the index’s more-than-0.6% gain. A closer look at WFC Wells Fargo and Morgan Stanley are very different banks compared with tech-focused SVB, which had a customer base heavily skewed toward startups and venture capitalists, and inadequate liquidity due to its poorly constructed securities portfolio . Because of their size and standing as Global Systemically Important Banks (G-SIB), both Club holdings were also subject to more intense regulatory scrutiny than SVB. Plus, due to its scandal-ridden past , Wells Fargo faces even more oversight than peers, including a Fed-imposed asset cap that constrains its capacity to issue new loans. WFC YTD mountain Wells Fargo’s stock performance year to date. Despite these differences with SVB, its demise may be causing Wells Fargo investors to rethink their expectations around the bank’s net interest margin — a key financial metric because of its large customer deposit base. Net interest margin (NIM) is the difference between the money a bank makes on loans, known as interest revenues, and what it pays customers for their deposits, known as interest costs. A compression of NIM can put downward pressure on overall earnings at a bank like Wells Fargo. The SVB saga highlights the challenges a bank can face when its deposit levels decline in a meaningful way. For SVB, this took place in recent months due to higher-than-expected cash burn at the many startups which kept their money at the bank. Eventually, SVB decided to sell assets, booking a $1.8 billion after-tax loss in the process, to ensure it could meet customer withdrawal demands. For Wells Fargo and other consumer-oriented banks, investors aren’t concerned that startup cash burn will cause deposit levels to decline. Instead, the question more generally is whether those types of banks will be forced to pay customers a better interest rate to entice them to keep deposits on hand. That helps explain why NIM is seeing additional attention in recent days. To be sure, investors and analysts were already discussing NIM pressures prior to SVB’s collapse because interest rates had risen enough that higher-yielding alternatives like money market funds and Treasuries looked more compelling. Essentially, higher interest rates went from providing a lift to Wells Fargo in the early days of the Fed tightening cycle to now being a potential headwind. Treasuries compete for deposits, especially larger deposits where the depositor may have no issue with tying the money up until the government bond matures. Of course, the decline in Treasury yields seen in recent days may make the idea of rushing out of bank deposits and into bonds less enticing. While near-term NIM questions will likely hang over Wells Fargo, the bank’s fundamental turnaround story that first attracted us to the stock is still intact. (Jim Cramer’s Charitable Trust is long MS and WFC. 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. 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Pedestrians pass a Wells Fargo bank branch in New York, U.S., on Thursday, Jan. 13, 2022.
Victor J. Blue | Bloomberg | Getty Images
In the wake of the collapse of Silicon Valley Bank, financial stocks are under pressure as the market assesses the ongoing fallout and impact on regional lenders. But we remain confident in our two bank holdings and think Morgan Stanley (MS) – down around 8% over the past three trading sessions – is now a buy.