One would think that 2018 is the perfect time to boost lending to consumers. The economy is strong, the job market is robust, and things are generally humming along nicely. Think again, as US banks are worried about US consumer credit quality and are starting to reign in lending. Bad debt is rising and so is the amount of bad credit banks are having to swallow. Beyond just fundamentals, the competition to lend has made the market uber-competitive, which heightens the risks for lenders because of weaker terms.
FINSUM: Consumer credit is tightening its belt across the board as credit balloons and standards fall. We wonder how much this tightening might impact the economy over the next year.
A lot of investors are worried that the turmoil in Turkey could spark a global financial crisis. In particular, Turkey’s weak position could spread to European banks, letting the situation balloon from there. However, the reality is that such fears are overblown, according to a credit analyst. Europe’s banks are actually in a strong position and can absorb losses from Turkey, so there does not seem to be any contagion to spread. Turkey’s problems are largely self-inflicted and unique as well, so it is hard to see all EMs succumbing to the panic.
FINSUM: From an American investor’s standpoint, the Turkey situation should not be very concerning as it does not seem to have much direct relationship to the US economy or markets. Hence our shares rising while Europe’s are falling.
We have been hearing it for a couple of months now—it is time for financial stocks to shine. Yet, financial shares are having a pretty poor year. The reason appears to be the flattened yield curve. However, a new academic study finds that it is not primarily the yield curve, but rather short-term rates alone that dictate most of financial share performance. The spread between government and corporate bonds is also a factor. Looking at historical performance of financials as compared to rates, it seems like financial shares are about 9% below their fair value.
FINSUM: As our readers will know, we are not fond of historically-driven strategies, but we do give this one credit in that it is finally a new way of looking at the situation in bank shares.
The Volcker Rule was one of the more divisive aspects of the Dodd-Frank legislation. The rule virtually outlawed proprietary trading, but arguably led to less liquidity, especially in fixed income markets. Now the rule has been partially pulled back, and there are is a view to gutting it entirely, but some warn about the dangers of doing so. According to the Financial Times, there are big risks to repealing the rule as it would arguably bring back the casino mindset that dominated big bank trading before the Crisis.
FINSUM: Banks are doing very well and the trading system has operated quite smoothly since the introduction of the Volcker Rule. We see no legitimate reason to overturn it.
Bank shares have been getting brutalized. S&P 500 financial shares are down 12% since their peak in January, and have lost ground 12 says in a row, the longest run ever. JP Morgan’s share price is now below its 200 day moving average, a key technical level. The flattening yield curve has been weighing on the shares even as investors get ready for a flurry of dividends and buybacks from the sector. So far banks have avoided seeing declines in their net interest margins, but that can only last for a time.
FINSUM: Banks trade with the direction of the economy, and a flatter yield curve is both a predictor of recession and directly bad for bank earnings.