U.S. banks have taken a beating in recent weeks on concerns that they are overexposed to Europe and would suffer in a U.S. recession. Morgan Stanley has been particularly punished.All eyes will be on bank earnings announcements as they come out in upcoming weeks.
Goldman Sachs banks research team led by Richard Ramsden just released a note titled “Separating myth from reality for U.S. Banks.” In it he describes why fears over the U.S. banks may be way overblown.
Back in 2008 when Lehman Brothers went belly up, overnight interbank lending rates skyrocketed, ultimately causing credit markets to freeze. However, bank lending rates, as measured by the LIBOR--OIS spread, are relatively low.
Soaring credit-default swap spreads suggest banks may be under financial distress. However, Ramsden notes that banks are 'flush with liquidity, and near-term funding needs are low.'
But Ramsden also warns that banks could be at risk of contagion and indirect exposures, such as the falling risk-asset prices. He notes that falling prices, such as those in the subprime mortgage and commercial mortgage backed securities markets, could appear as operating losses in some banks' Q3 financial results.
Ramsden notes that U.S. banks' gross exposure is high, but the net exposure 'appears more manageable.'
But he also cautions that the actual net exposure will also depend on how well hedges work during these uncertain times.
European banks in financial distress are selling off funded dollar denominated assets to U.S. banks. U.S. banks will likely be able to grow in businesses including aircraft leasing and commercial real estate.
Both U.S. and European banks are trading at similar valuations based on price to tangible book value. However, U.S. banks are in a position to post relatively stronger earnings than their European counterparts. As such, Ramsden believes valuations for U.S. banks are likely to rise as stock prices rise on earnings announcements from banks like Wells Fargo and US Bancorp.