Should We Really Be Worried About Banks/Credit?
Stocks dropped late last week on rising concerns that loan defaults could impact regional bank earnings and be a warning sign of a larger credit problem that could hurt the U.S. economy. Anytime “credit concerns” appears in the financial media, unpleasant memories of the financial crisis reappear and that can make clients nervous.
I have found the best way to address those fears is with facts, so I wanted to provide facts about what happened last week, so we can all put it in proper context and see that the facts strongly imply there is not a credit problem large enough to impact the economy. It was Zion Bank’s 8K disclosure of a loan writeoff on Thursday that sparked the decline in stocks. But ZION disclosed $50 million in losses, while Jefferie Bank’s exposure was listed at just $43 million. JPMorgan (JPM) disclosed $170 million in losses, but those are very small amounts for those companies.
For reference, ZION revenue was more than $800 million last quarter, while Jefferies had quarterly earnings of more than $200 million and JPM reported net income of $14.6 billion! Point being, these losses are very small compared to the size of these companies and this issue would have to metastasize massively for it to become a larger problem.
Second, many of the regional banks reported earnings last week and there wasn’t any widespread mention of larger-than-expected loan losses, implying this is relatively isolated to lenders that engaged with Tricolor and First Brands. Comerica (CMA), Fifth-Third (FITB), Huntington Bank Corp (HBAN), Regions Financial (RF), State Street (STT) and Truist (TFC) all reported earnings on Friday morning and there was no widespread mention of elevated loan losses or credit concerns. Their earnings were a surprise on the upside.
Finally, even if there is a larger credit issue, we must remember that the Fed now acts very aggressively to provide needed liquidity and shore up the system. We know that because they did it two years ago, when Silicon Valley Bank, Signature Bank and, eventually, First Republic all went under due to losses from quickly rising bond yields. That had the potential to become a more systemic issue, but the Fed acted quickly and aggressively to stop it.
So, even if this situation does prove to be a much bigger issue (which, according to the facts, is very unlikely), the Fed is there and history proves it’ll act quickly and decisively. Bottom line, the anxiety around Tricolor and First Brands really stems from worries that, amidst this multi-year “everything” rally, pockets of excess and lax risk controls exist throughout the economy in bank loans, private credit investments, AI infrastructure, etc.
That’s not a risk that should be dismissed as periods like this have, in the past, led to inflated valuations and bubbles. In many ways, I appreciate and agree with that concern. But we can’t front-run it. We have to follow the facts and when the facts tell us a situation has the potential to become systemic, the key is to recognize it early and act.
So far, the facts simply do not say what we saw with Tricolor or First Brands is, in any way, systemic. So, they do not change the still-positive outlook for the market, nor does it change the source of real risk, which is that the AI infrastructure bubble begins to deflate. Positively, there are no signs that’s happening right now, but we will continue to monitor it very closely because that’s a much bigger concern for me about this market than loose loans and companies that collapsed from plain-old fraud.
My point is, our job is not to necessarily provide the best balance portfolio in the marketplace. Our job is to watch the markets closely to help you avoid any major missteps that can hurt the security of your money. Now that may mean we ride the short term downturns, but we will remain diligent to avoid the worst case scenarios and provide you good advice in those volatile times.
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