Banks are as healthy as ever, and robust investment-grade debt issuance has bolstered the industry’s profitability.
The global pandemic has cratered economies and affected businesses the world over. But the US banking system remains healthy because banks are well capitalized, having adhered to rules put in place after the 2008 financial crisis. Equally important: Investment-grade debt issuance by corporates is generating bank profits.
- That’s some of what members of NeuGroup’s Tech20 Treasurers’ Peer Group heard at a recent meeting from a bank equity strategist.
- “The investment-grade markets are stronger than ever,” the strategist said. “Funding markets are very robust, with corporates taking advantage of low rates.”
- Data from US securities industry organization SIFMA and financial tech and data company Refinitiv show that investment grade companies have issued more $1 trillion in debt this year. As a result, the strategist said, bank industry profits “are going gangbusters,” noting that this is a continuation of a long-term trend.
Texas ratios. This all means that despite the current economic straits, “We can handle a greater level of the problems we’re facing,” the strategist said. He also referred to the “Texas ratio,” which, by dividing nonperforming assets by tangible common equity and loan-loss reserves, helps investors determine how risky a bank is. (The higher the Texas ratio the more financial trouble a bank might be in.) By this measure, the sector is, “very healthy.”
- That health stems in part from banks “setting aside a lot of money for loan losses” in the first quarter, the strategist said. He acknowledged that deferments “are happening” and loan forbearances “are way up;” additionally, bank lending standards are tightening and “demand is going down.” He added that he expects bank earnings to be weak “but this is not a balance sheet event or credit event.” Bottom line: “The banking system is as healthy as its been in our lifetimes.”
Weakness in Europe. The strategist said that while US banks are in top form, European banks are not. That’s because of the zero interest rate environment in the European Union. The European bank sector is weak because zero rates makes banks inefficient, the strategist noted. “European banks are as weak as they were in during the ’08-’09 financial crisis,” he said. US banks have taken a hit and are a great shape, and “nowhere near ’09 levels.”
Negative rates in the US? While there are negative rates globally, the strategist didn’t think the US would go that route. “There are now unprecedented levels of negative rates” globally, he said. “Will US go there? No, because we have a huge money market fund market and if we break the buck again, then it will be a huge mess.” And it certainly would be “negative for bank profitability.”
