John Toohig & Nate Stovall: Bank Loan Market Is “Very Frozen”
Oct 18, 2023
01:11:19
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John Toohig and Nate Stovall discuss the state of the U.S. banking industry, covering topics such as surging deposit costs, rising defaults, and a freeze on loan liquidity. They also explore declining margins in the bank loan market, the usage of held to maturity portfolios in banking, credit delinquencies and default rates, impacts of reserve methodology, challenges in the mortgage industry, interest rates and deposit growth, and market dynamics shifting from a seller's to a buyer's market.
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Quick takeaways
Deposit costs are rising more rapidly than short-term interest rates, putting pressure on bank margins and funding.
Commercial real estate loans are facing challenges and require individual borrower assessment and adjustments.
While there may be concerns about credit and liquidity, the current challenges in the banking industry are more related to funding and earnings than credit.
Deep dives
Overall Outlook on Banks
The overall outlook on banks is that margins are compressing, deposit costs are rising, loan growth is slowing, and credit is holding with some concerns in lower-end credit segments such as cards and autos. Commercial real estate loans are facing challenges, and regional institutions are hunting for cash and seeking new sources of funding.
Deposit Beta and Interest Rate Risk
Deposit beta has increased, with deposit costs rising more rapidly than the short-term interest rates. Banks are trying to attract and maintain funding, resulting in margin pressure. The impact of long-term interest rates rising is affecting borrowers and lenders, making loans less profitable and creating challenges for commercial real estate loans. The lag effect may still cause increases in deposit costs even if the Federal Reserve does not raise interest rates further.
Excess Savings and Consumer Credit
There are significant levels of excess savings among consumers, which provide a cushion for credit risks. While there has been a slowdown in mortgage origination due to higher rates, mortgages have shown strong underwriting and low delinquency rates. Commercial real estate loans have experienced a lack of origination and trading activity, with a focus on individual borrowers and sponsors to assess creditworthiness and address liquidity concerns.
Outlook for Banks and Commercial Real Estate
The outlook for banks is a slow grind with slow deposit growth, slow loan growth, and credit normalization. Credit delinquencies are historically low, and while credit conditions might worsen, they are not expected to lead to a severe downturn. Commercial real estate loans face specific challenges, with haircuts expected on office assets and a need for individual borrower assessment and adjustments. Loan origination is slowing, driven by a combination of funding challenges, economic uncertainty, and credit risk considerations.
Challenges for finance professionals in the current economic environment
The podcast discusses the challenges faced by finance professionals in the current economic environment. The focus is on the importance of getting rates, margins, and funding costs right, as well as the impact of credit and funding on loan qualifications. The conversation also highlights the differences between the current situation and the 2008 financial crisis, emphasizing that the current challenges are more related to funding and earnings rather than credit. The discussion suggests that while there may be some concerns about credit and liquidity, the situation is not as dire as the previous crisis and banks have the potential to earn their way out of the current challenges.
Outlook for investment banking and capital markets
The podcast explores the outlook for investment banking and capital markets. It highlights that there has been a flurry of activity in 2021, but a slowdown is expected in 2022 due to economic uncertainty. However, there is optimism that things will improve in 2023 and 2024 as there is a growing pipeline of potential transactions. The conversation also mentions the potential for increased M&A and acquisition activity, particularly in 2024, as banks may look to merge and consolidate in order to navigate the challenging environment. Overall, while there are uncertainties, the episode suggests that as long as there is more stability and certainty in the market, there is potential for increased deal activity in the future.
John Toohig, managing director and head of whole loan trading at Raymond Jaymes, and Nathan Stovall, director of the financial institutions research team for S&P Global Market Intelligence, join Jack Farley on Forward Guidance to update listeners on the state of the U.S. banking industry. Surging deposit costs, steadily rising defaults, and a freeze on loan liquidity are just some of the topics discussed in this conversation. Filmed the afternoon of October 18, 2023.
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Latest edition of John Toohig’s “Let’s Talk Loans”: https://www.linkedin.com/pulse/lets-talk-loans-vol-70-john-toohig/
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Follow John Toohig on Twitter https://twitter.com/RJWholeLoans
Follow Nate Stovall on Twitter https://twitter.com/StreetTalkpod
Follow Jack Farley on Twitter https://twitter.com/JackFarley96
Follow Forward Guidance on Twitter https://twitter.com/ForwardGuidance
Follow Blockworks on Twitter https://twitter.com/Blockworks_
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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