The big bank environment has been marred by ‘too big to fail’ and now the very process that saved our financial system may begin the downfall of large national banks.
Two fronts are now threatening the ‘big bank’ as it sits today. First, persistent low interest rates and second, the threat low oil prices present to borrower’s ability to repay. These two factors and their current crash course are becoming more and more challenging for the ‘big bank’ to withstand.
Low interest rates over the last 8 years have left profitability in the banking industry at low levels. It’s tough to call billions in quarterly revenue low, but by traditional measures the net interest margin on accounts has fallen. Without the engineering of credit and fees, which were both cut largely by Dodd Frank, ‘big banks’ are relying on size and investment and debt revenue for those profits. With the introduction of negative interest rates across Japan and the Eurozone, a new threat hits banks. Negative rates further curb traditional methods of bank profitability.
Further exacerbating the problem is the current environment around oil. With many energy companies struggling to stay the course, companies that looked very viable at $115 per barrel suddenly look perilous at $33 a barrel. These loans present risks to bank balance sheets. So much so that JPMorgan and Wells Fargo announced this week that they are increasing loan loss reserves to account for the risks in the energy industry[1].
US Data
Q4 GDP was revised up to 1% after much speculation that it would be reduced from 0.7% to 0.4%. This revision, while a positive, was perceived as a negative by investors as it signals increased risk of Federal Reserve Action. Consumer Confidence slid from 97.8 to 92.2 in February. Otherwise consumer based data was strong for the week, i.e. Durable Goods Orders went from -4.6% to 4.9%, Michigan Consumer Sentiment and expectations both grew more than expected, and personal spending increased 0.5% month over month[2].
Housing Data
Housing information released this week continued to confirm the current strength of the resale market. Existing home sales increased 0.4% in January, beating expectations by 150,000 units. New homes sales fell by 9.2% or 50,000 units. As new homes are a smaller market it is always best to recognize the units. Lastly, the S&P/CS Home Price Index (20 City) grew by 5.7% year over year in December[3]. Denver helped raise the average, increasing 10.2% in 2015[4].
International Data
PMI data for the Eurozone softened in February as have the Eurozone equity markets. The resolve of Mario Draghi, President of the European Central Bank, will be tested as they determine how to best inject liquidity into their markets.
The potential of a British exit of the Euro (Brexit) has become more likely as key supporters of the move have emerged. A Brexit could pave the way for others to follow their lead.
The Peoples Bank of China is looking for additional deficit spending from Beijing to stimulate the Chinese economy. If the funding were to occur, we could see short term pains domestically as we adjust to a strong China trade stance.
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[1] www.troweprice.com – weekly market wrap ups
[2] www.investing.com – economic calendar
[3] www.investing.com – economic calendar
[4] www.stlouisfed.org – research