INSIGHT: Banking woes rattle US chem shares

HOUSTON (ICIS)–Shares of US-listed chemical companies fell on Wednesday amid concerns about the implications of a string of bank failures.

Already, US regulators have shut down two banks and a third had voluntarily chosen to close.

Concerns increased when Credit Suisse warned in its annual report that it found significant weaknesses in its internal controls over its financial reporting for 2022 and 2021. Despite those weaknesses, Credit Suisse said its annual report fairly reflects the company’s finances for 2022 and 2021.

Earlier, European shares of chemical companies declined as part of a larger sell-off.

After European markets closed, the Swiss National Bank said it would provide Credit Suisse with liquidity if needed. So far, Credit Suisse meets the capital and liquidity requirement for systemically important banks.

US stock markets were down substantially during the day, with the Dow Jones Industrial Average falling by more than 2%. They recovered in the afternoon, although chemical indices performed much worse, as shown in the following table.

Index	15-Mar	Change	%
Dow Jones Industrial Average	31,874.57	-280.83	-0.87%
S&P 500	3,891.93	-27.36	-0.70%
Dow Jones US Chemicals Index	789.36	-26.50	-3.25%
S&P 500 Chemicals Industry Index	785.97	-23.99	-2.96%

SUMMARY OF BANK FAILURES
On 8 March, Silvergate Capital said it chose to wind down its operations, voluntarily liquidate its bank and fully repay all deposits.

Silvergate Capital focused on cryptocurrency.

On 12 March, regulators had shut down Silicon Valley Bank, making it the second largest bank failure in US history.

Washington Mutual Bank’s (WaMu’s) failure in 2008 was the largest, according to the Wall Street Journal. It had assets of $307bn and deposits of $188bn.

For comparison, Silicon Valley Bank (SVB) had assets of $209.0bn and $175.4bn in deposits, according to the Federal Deposit Insurance Corp (FDIC), a US regulator.

The bank’s concentration in the tech sector caused its deposits to surge during the aftermath of the pandemic. The bank then invested those deposits in longer duration bonds.

The value of those longer duration term bonds fell after the US Federal Reserve started its aggressive campaign of monetary tightening and interest-rate hikes.

The initial concern with the failure of SVB is that a significant amount of the accounts was uninsured. The US government provides insurance for individual accounts of up to $250,000.

SVB served many technology companies that had accounts exceeding the $250,000 threshold that would be guaranteed by FDIC insurance. Initially, markets were concerned about the repercussions of so many depositors losing access to their funds.

Companies with uninsured accounts could have trouble making payroll or funding other day-to-day expenses. Even if the companies are solvent, the sudden lack of liquidity could disrupt operations.

US regulators had initially put those concerns to rest on Sunday by announcing that it would protect uninsured SVB deposits.

By that time, Signature Bank had failed. Signature had assets of $110.4bn and deposits of $88.6bn.

Like Silicon Valley Bank, Signature Bank clients included many technology and venture capital companies. The failure at Silicon Valley led to a run on Signature Bank.

IMPLICATIONS
The concern is that smaller, regional banks could become susceptible to a lack of confidence, sparking a run on the banks.

Banks could respond to these fears by becoming more reluctant to issue loans and being more selective about who qualifies for a loan.

That would tighten credit and money supply, making it more challenging for chemical companies and other businesses to get loans.

At the least, tighter lending standards could slow down activity for industries that are significant downstream consumers of chemicals.

The chief economist for the US National Association of Home Builders (NAHB) warned that problems at regional banks could further constrain lending to construction companies – at a time when the Federal Reserve has already significantly tightened monetary policy.

The Federal Reserve may consider these vulnerabilities and threats when it meets to discuss interest rates next week.

It had been anticipated that the Federal Reserve would increase rates by up to half a point on 22 March. Now expectations have shifted to a quarter-point hike or a pause.

The Federal Reserve also will release its economic projections on 22 March.

CHEMICAL STOCK PERFORMANCE
The concerns about the banking sector and the overall economy are playing out in the stock market.

The table below shows the US-listed chemical companies followed by ICIS.

Name	$ Current Price	$ Change	% Change
AdvanSix	34.76	-1.46	-4.03%
Avient	37.91	-2.01	-5.04%
Axalta Coating Systems	27.82	-1.71	-5.79%
Braskem	6.94	-0.09	-1.28%
Celanese	28.57	-2.52	-8.11%
Chemours	102.31	-5.69	-5.27%
DuPont	67.84	-2.46	-3.50%
Dow	50.48	-1.81	-3.46%
Eastman	80.17	-2.71	-3.27%
HB Fuller	65.08	-1.28	-1.93%
Huntsman	27.28	-0.51	-1.84%
Kronos Worldwide	8.66	0.11	1.29%
LyondellBasell	84.16	-3.23	-3.70%
Methanex	44.31	-2.61	-5.56%
NewMarket	340.2	-1.98	-0.58%
Ingevity	71.36	-0.36	-0.50%
Olin	50.2	-2.25	-4.29%
PPG	125.43	-3.73	-2.89%
RPM International	84.19	-2.03	-2.35%
Stepan	96	-1.15	-1.18%
Sherwin-Williams	216.55	-0.44	-0.20%
Tronox	12.93	-0.85	-6.17%
Trinseo	19.77	-1.22	-5.81%
Univar Solutions	34.7	-0.21	-0.60%
Venator Materials	0.39	0.00	0.00%
Westlake	105.94	-3.56	-3.25%

Insight article by Al Greenwood

Additional reporting by Stefan Baumgarten and Will Beacham

Thumbnail shows money. Image by Al Greenwood