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Month: February 2016

Bad time to be a bank

Bad time to be a bank

Bank stocks have plunged in the new year, surprising a number of analysts and investors who had hoped that the long-awaited rate rise by the Federal Reserve would (finally!) help boost financials’ collective profit margins. Instead, the market seems squarely focused on the turning of the credit cycle and the idea of losses yet to come.*

On that note, I think it’s worth reiterating where the froth on bank balance sheets lies.

I’m willing to bet it’s about to get interesting to be a banking reporter again.

Fierce battle for corporate loans sparks US bank risk concerns (May 2013, Financial Times) – US banks were sharply increasing loans to big and small businesses in the aftermath of the financial crisis. In itself, the move to more business lending was not necessarily a bad development for the wider economy, or for the banking system. But the worry, as ever, was that intense competition to extend more commercial loans combined with a desperate need to boost return on equity, could spur banks to offer money at dangerously low rates and on far too loose terms.

Regulators on alert as US banks boost commercial loans (May 2013, Financial Times) – Companion piece to the above. This part proved rather ironic in the wake of collapsing oil prices: “Dick Evans, the chief executive of Texas-based Frost Bank, remembers the recession that hit the Lone Star state in the 1980s: banks that had been lending to booming energy groups suffered when the price of crude collapsed. Then, he says, it was real estate lending that banks turned to in an effort to replace some of their lost returns from commercial lending. Three decades on, that history may be reversing across the US [as banks trade real estate lending for commercial loans].”

Wall Street trades home mortgages for corporate credit – (July 2014, Financial Times) – Home mortgage lending stagnated as banks and other lenders grappled with new rules and the continued fallout from the biggest housing crash in US history. At the same time, lending to many American companies surged, helping shift Wall Street’s once-dormant securitisation machine into gear, while the market for corporate bonds also boomed (with much of that money flowing into the energy sector). Where once the origination and bundling of home loans was big business, corporate credit has for the past few years been the thing keeping banks and other financial institutions busy.

Commercial credit is the new mortgage credit – (September 2015, Bloomberg) – Key sentence: “Whether the surging popularity of commercial credit in all its forms results in the same kind of bust that overtook the housing bond market remains to be seen. Plenty of analysts, investors and regulators have certainly expressed concerns about an asset class that is being chased by so many yield-hungry investors, and pitched by so many profit-hungry financial institutions.”

All that commercial lending by banks suddenly isn’t looking so hot – (January 2016, Bloomberg)  – Written a day or two before the beginning of bank earnings season, this post pointed out that financial institutions; commercial and industrial (C&I) loan portfolios were showing signs of cracking. Sure enough, the fourth-quarter earnings season yielded a bunch of big-name banks setting aside more loan loss provisions to cover soured energy loans, which fall into the C&I classification.

*And I haven’t even mentioned the impact of negative rates, which wreak havoc on the business model.