This week the BCA reports that Bank Worries Continue to Mount:
“The bank index continues to spiral downward in relative performance terms. Concerns about loan quality are steadily building, a natural by-product of the freewheeling lending boom in recent years. Banks have been lowering their exposure to mortgage backed securities in order to fund lending for M&A deals, but exposure to U.S. housing remains sufficiently large to deliver a blow to profitability should the sector continue to sour.”
At the same time the Wall Street Journal points out the positive correlation between the fate of big bank profits and the enormous leverage they have been so instrumental in creating during this cycle. When the leverage was positive the banks profited handsomely, but now that the wide scale risk re-pricing is upon world debt markets, the risks to the downside also fall squarely upon them:
“A sudden retrenchment in debt markets is likely to nip at profits at the big banks that have been financing the leveraged-buyout boom around the globe.”
Bottom Line: Banks are about to see the down side of the up they have enjoyed this cycle.