From JPMorgan, some commentary on the banks, which got slaughtered yesterday in the first day of trading following the downgrade.
We view the downgrade of US long-term debt as a negative longer term for US banks. It raises a key question of whether this will shift the share of US government debt in foreign investors’ portfolios over the long term and what will be the knock-on effect on other fixed income securities. Near term, the downgrade risks further impairing the already weak consumer confidence in the US. We expect the following key impacts on banks from the downgrade: 1) macro environment—slower recovery; 2) pressure on net interest margins from higher long-term debt costs; 3) modest pressure on capital ratios from securities portfolios. Given competition for loans, it is unclear that higher bank debt costs can be passed on to borrowers near term. Increase in market spreads on other securities such as mortgage backed, asset backed, or other securities would raise the cost of borrowing, which could hurt loan growth. However, in our view, a sizable increase in loan growth is more likely to be driven by improved confidence among consumers and in turn, corporates. We do not expect this downgrade to result in the need for capital issuance by our banks—mainly slower recovery in earnings. In fact, some of our banks are buying back stock. Bank stocks are down sharply over concerns about the fallout, trading at 1.0x tangible book and 0.8x book value on average. We expect banks such as USB and WFC to actively repurchase stock at these attractive valuations. The key unknown near term is the risk of a double-dip recession, but valuations are attractive medium term given generally strong capital and reserves.
Meanwhile, for the bull case on markets and the banks at these levels, see this excellent post from David Goldman.