Regional banks: the deposit question nobody wants to reopen

Regionals traded at 75.26 this morning, +0.98% on the session. I want to talk about funding, because it is the part of a bank that decides everything else and the part that gets the least attention until it suddenly gets all of it.

Balance sheet risk in plain English

A bank borrows short and lends long. That is not a flaw in the model, it is the model. The risk is that the cost of the short borrowing moves faster than the yield on the long lending, and the gap between those two speeds is where a bank's margin lives or dies.

Deposits are the borrowing. When they are sticky and cheap, the bank is a good business. When depositors become price-sensitive, the same loan book supports a much worse business, and nothing about the loan book has changed.

What I look at

• Deposit beta. How much of a rate move passes through to what the bank pays. The single most important number and the one most often glossed over.
• The mix. Non-interest-bearing as a share of total. This is the cushion, and it erodes quietly.
• Loan concentration. Particularly commercial property exposure as a share of tier one capital, where the distribution across the sector is much wider than the averages suggest.
• Securities marks. Both the recognised and the held-to-maturity ones, because the second only stops mattering if nothing forces a sale.

Why I am not positioned

The margin story here depends almost entirely on how depositors behave, and depositor behaviour is precisely the variable I cannot observe until after it has happened. Quarterly disclosure is too slow for something that can move in a fortnight.

I am comfortable being wrong about a company. I am not comfortable being wrong about whether I can see the risk at all.

Valuation looks undemanding across parts of the sector. That is an argument for looking, not an argument for owning. Cheap banks are frequently cheap for a reason that becomes obvious slightly too late.

What would get me involved

Evidence that deposit costs have peaked and the mix has stabilised, across more than one quarter and more than one bank. That is a slow signal, and I would rather catch the second half of a recovery here than the first half of something else.