Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

After yesterday's halted trading, US banks could be due a nice bounce today as a risk-on bounce takes shape -if it does at all, or fades.US bank shares have been hit hard, not as badly as transportation and oil stocks, but meaningfully. The coronavirus has taken its toll on risk sentiment, because of the economic and profit implications of disruption, driving US yields on safe-haven status deeply into unknown territory- and into a zone where basic banking logic fails. A new normal of low-to-negative yields, as in the troubled Japanese and European banking systems, is having a ripple effect on US bank profitability despite the protestations that the US will eschew a similar fate. Low-rate regimes punish savers, pensioners, and anyone else relying on deposit-based income,  while proportionately benefiting equity and real estate investors. We are not so sanguine that the US will dodge the bullet or that US risk assets are out of the woods by any means: global dynamics are moving in one direction. This will not bother President Trump, who built his business model on cheap debt, as he seems to favour more "competitive" US rates much to the chagrin of bank executives. The greatest challenge for the US Banking System is to avoid low or negative rates: the Fed tried and failed to normalise the rate environment a few years ago (recall Dimon calling for 4% rates) and has succumbed to QE and repo infusions to keep the show on the road with consequences. Negative real rates squeeze the net interest margins of banks that pay a penalty to store excess reserves but that are unable to pass on negative rates to depositors ; many European banks have lost more than a third of their market capitalization since January 2018 as a result. Some central banks have even reported that commercial depositors have asked to store cash in vaults to avoid being penalized by negative rates. Lowering rates further into negative territory only worsens this issue. In the corporate sector, negative rates can also create a moral hazard of sorts as companies confuse cheap financing with sound capital investment, or where marginally profitable companies remain in business due purely to the low cost of capital.In an unprecedented event, US yields from 3 months to 30 years have fallen below 1%, paving the way for a period of unprofitable financial intermediation and margins in the US, especially given relatively high CIRs. US banks are generally higher inefficient and rely on fat net interest margins of say between 2.5-3.5%. Such a scenario may change - we expect a rally today in bank stocks and higher yields- but the risk exists that rates will remain lower-for-longer, underpinning US bank under performance. Why? Debt burdens (of all types) are elevated while globalisation, aging demographics, and technology-related price deflation exert a downward pull on rates, accentuated by cofid19 and the politics of oil.<div class="content-highlight">
Lower yields are accompanied by a rise in credit risk. The oil price imploglio immediately raises the question: which US banks are exposed to potential distress and default in this space? Besides behemoths such as JP Morgan and Citi and the deeply troubled Wells Fargo, we highlight PNC Financial, US BankCorp, Regions Financial, BOK Financial Corp, Comerica, Texas-centric banks such as Texas Capital, Independent bank Group, Hancock Whitney, Cadence Bancorp, and KeyCorp.
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At Cadence, energy loans account for approximately 11% of the bank's total net loans. BOK Financial and Cullen/Frost carry about 10% of loans dedicated to energy sector. Legacy problem energy loans mark Texas Capital, Independent Bank, Cadence and Hancock Whitney. KeyCorp has supplied copious loans to fracking concerns. Comerica has quite a large Texas exposure.
Canadian and Australian banks are overexposed too, let alone oil exporter banks. Avoid.
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</div>So US banks will enjoy a bounce today. But the bigger picture of deeply low yields and oil-related credit risk, accompanied by beefed-up sub-prime auto loans, student indebtedness, and leveraged loans, indicate that the system is more vulnerable than many think as loan losses mount. Lending is soft. Products are marked by deflationary pressures. US bank shares have been pummeled for a reason, hovering on bear market classification. The risk of owning them has risen. Despite intermittent bounces, we believe the sector is in trouble from an investment perspective. Banks need a different type of yield curve and normalised rates and better quality credit growth to make money. The oil price debacle adds fuel to the fire. I wonder if the horse has bolted and the prospects of US banks are now grisly though better than the forlorn markets of Japan and Europe. If you want to hold bank shares, selective EM just got more valuable though rates trajectories need to be monitored carefully there too.The oil price bear market, galvanised by supply and demand forces, is a kick in the teeth for -or a proverbial nail- to the US banking system. If energy prices remain at these low levels, we will see a sharp uptick in negative credit quality trends and losses at the most energy exposed banks.

After yesterday's halted trading, US banks could be due a nice bounce today as a risk-on bounce takes shape -if it does at all, or fades.US bank shares have been hit hard, not as badly as transportation and oil stocks, but meaningfully. The coronavirus has taken its toll on risk sentiment, because of the economic and profit implications of disruption, driving US yields on safe-haven status deeply into unknown territory- and into a zone where basic banking logic fails. A new normal of low-to-negative yields, as in the troubled Japanese and European banking systems, is having a ripple effect on US bank profitability despite the protestations that the US will eschew a similar fate. Low-rate regimes punish savers, pensioners, and anyone else relying on deposit-based income,  while proportionately benefiting equity and real estate investors. We are not so sanguine that the US will dodge the bullet or that US risk assets are out of the woods by any means: global dynamics are moving in one direction. This will not bother President Trump, who built his business model on cheap debt, as he seems to favour more "competitive" US rates much to the chagrin of bank executives. The greatest challenge for the US Banking System is to avoid low or negative rates: the Fed tried and failed to normalise the rate environment a few years ago (recall Dimon calling for 4% rates) and has succumbed to QE and repo infusions to keep the show on the road with consequences. Negative real rates squeeze the net interest margins of banks that pay a penalty to store excess reserves but that are unable to pass on negative rates to depositors ; many European banks have lost more than a third of their market capitalization since January 2018 as a result. Some central banks have even reported that commercial depositors have asked to store cash in vaults to avoid being penalized by negative rates. Lowering rates further into negative territory only worsens this issue. In the corporate sector, negative rates can also create a moral hazard of sorts as companies confuse cheap financing with sound capital investment, or where marginally profitable companies remain in business due purely to the low cost of capital.In an unprecedented event, US yields from 3 months to 30 years have fallen below 1%, paving the way for a period of unprofitable financial intermediation and margins in the US, especially given relatively high CIRs. US banks are generally higher inefficient and rely on fat net interest margins of say between 2.5-3.5%. Such a scenario may change - we expect a rally today in bank stocks and higher yields- but the risk exists that rates will remain lower-for-longer, underpinning US bank under performance. Why? Debt burdens (of all types) are elevated while globalisation, aging demographics, and technology-related price deflation exert a downward pull on rates, accentuated by cofid19 and the politics of oil.
Lower yields are accompanied by a rise in credit risk. The oil price imploglio immediately raises the question: which US banks are exposed to potential distress and default in this space? Besides behemoths such as JP Morgan and Citi and the deeply troubled Wells Fargo, we highlight PNC Financial, US BankCorp, Regions Financial, BOK Financial Corp, Comerica, Texas-centric banks such as Texas Capital, Independent bank Group, Hancock Whitney, Cadence Bancorp, and KeyCorp.

At Cadence, energy loans account for approximately 11% of the bank's total net loans. BOK Financial and Cullen/Frost carry about 10% of loans dedicated to energy sector. Legacy problem energy loans mark Texas Capital, Independent Bank, Cadence and Hancock Whitney. KeyCorp has supplied copious loans to fracking concerns. Comerica has quite a large Texas exposure.
Canadian and Australian banks are overexposed too, let alone oil exporter banks. Avoid.

So US banks will enjoy a bounce today. But the bigger picture of deeply low yields and oil-related credit risk, accompanied by beefed-up sub-prime auto loans, student indebtedness, and leveraged loans, indicate that the system is more vulnerable than many think as loan losses mount. Lending is soft. Products are marked by deflationary pressures. US bank shares have been pummeled for a reason, hovering on bear market classification. The risk of owning them has risen. Despite intermittent bounces, we believe the sector is in trouble from an investment perspective. Banks need a different type of yield curve and normalised rates and better quality credit growth to make money. The oil price debacle adds fuel to the fire. I wonder if the horse has bolted and the prospects of US banks are now grisly though better than the forlorn markets of Japan and Europe. If you want to hold bank shares, selective EM just got more valuable though rates trajectories need to be monitored carefully there too.The oil price bear market, galvanised by supply and demand forces, is a kick in the teeth for -or a proverbial nail- to the US banking system. If energy prices remain at these low levels, we will see a sharp uptick in negative credit quality trends and losses at the most energy exposed banks.

US Financials: Energy Exposures Mean Boil, Boil, Toil and Trouble

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Bank stocks are breaking out this week from base patterns, and are among one of the timeliest Groups in which to add exposure. The size of these patterns—about 9 months in duration, and visible in the KBE and KRE ETFs —support further upside. Increase exposure.  In this report we highlight actionable bank charts. (This is not an all-encompassing list.)

Bank stocks are breaking out this week from base patterns, and are among one of the timeliest Groups in which to add exposure. The size of these patterns—about 9 months in duration, and visible in the KBE and KRE ETFs —support further upside. Increase exposure.  In this report we highlight actionable bank charts. (This is not an all-encompassing list.)

United States

Bank of Hawaii Corporation is a regional financial services holding company with locations throughout the Pacific. The Company and its subsidiaries offers a wide range of financial services to businesses, governments, and individuals in Hawaii, the West Pacific, and American Samoa. Bank of Hawaii provides services such as commercial banking, investment and trust services, and mortgages.

Atlantic Union Bankshares Corporation provides banking services. The Bank checking accounts, lending, credit cards, online and mobile banking, and wealth and treasury management services. Atlantic Union Bankshares serves customers in the United States.

Park National Corporation is a multi-bank holding company.  The Banks provide a variety of financial services, including savings and time accounts, consumer and real estate lending, safe deposit operations, and electronic funds transfers. Park National operates in Ohio.

Community Bank System, Inc. is a holding company for Community Bank, N.A.  The Bank offers a range of commercial and retail banking services in each of its market areas to business, individual, agricultural, and governmental customers. Community Bank operates in northern New York to the southern tier, west to Lake Erie, and in northeastern Pennsylvania.

CVB Financial Corp. is the holding company for Citizens Business Bank and Community Trust Deed Services.  The Bank attracts deposits and originates loans, as well as serves as a federal tax depository for its business customers. Citizens operates in Southern California.

Cathay General Bancorp is the holding company for Cathay Bank.  The Bank accepts deposits and originates various loans, and offers trade financing, spot and forward contracts, internet banking, global investment services, and other services.  Cathay Bank operates in California, New York, Texas, Washington, and Massachusetts.

Fulton Financial Corporation is a multi-bank holding company. The Banks offer a full range of general retail and commercial banking services, including deposits, loans, equipment leasing and financing, and credit cards. Fulton operates in Pennsylvania, Maryland, Delaware, and New Jersey.

Simmons First National Corporation is a multibank holding company.  The Banks offer various loans, credit card services, checking and savings accounts, personal and corporate trust services, and other products and services through offices located in Arkansas.

United Community Banks, Inc. is a multi-bank holding company with locations throughout north Georgia and western North Carolina.  The Banks are community oriented and offer retail and corporate banking services including checking, savings, and time deposit accounts, secured and unsecured loans, wire transfers, trust services, and rental of safe deposit boxes.

Associated Banc-Corp is a Midwest banking franchise headquartered in Green Bay, Wisconsin. The Bank offers a full range of financial products and services through banking locations serving communities throughout Wisconsin, Illinois, and Minnesota, and commercial financial services in Indiana, Michigan, Missouri, Ohio and Texas.

AMMB Holdings Berhad is an investment holding company.  The Company, through its subsidiaries, provides merchant and commercial banking, retail financing, stock and futures broking, and investment advisory. AMMB also underwrites general insurance, provides asset and unit trust management, and nominees services.

The Bank of East Asia, Limited and its subsidiaries provide general banking, related financial, business corporate, and investor services.

PT Bank CIMB Niaga Tbk operates in individual and private banking, merchant and corporate banking, regional banking, and investment services.  The Bank also provides financial services such as leasing and factoring, stock broking, underwriting, insurance and investment management through its subsidiaries.

Taichung Commercial Bank conducts commercial banking and trust business.  The Bank accepts deposits, offers loans, as well as  invests in bonds and stocks. Taichung Commercial Banks provides bills and notes discounting, draft endorsement, domestic remittance, guarantee, and securities underwriting and brokerage services.

Bank of Queensland Limited is a full service financial institution. The Bank operates retail branches, business banking centers, and equipment finance centers throughout Australia and New Zealand.  Bank of Queensland also operates an automated teller machine (ATM) network throughout Australia.

The Hachijuni Bank, Ltd. is a regional bank based in Nagano Prefecture. The Bank provides banking services such as deposits, loans, foreign exchange transactions, and trust accounts. The Bank also provides financial services such as leasing, credit cards, credit guarantee, debt recovery, trading, and venture capital and operates branches overseas.

Banca Popolare di Sondrio Scrl attracts deposits and offers co-operative banking services.  The Bank offers mortgage and other consumer loans, business loans, closed-end funds, treasury and securities brokerage services, asset management, and portfolio management.  Banca Popolare operates in Italy, Switzerland and Hong Kong.

Bank of Georgia Group PLC operates as a bank. The Bank services includes retail banking and payment services, corporate and investment banking, and wealth management operations solutions. Bank of Georgia Group serves customers in the United Kingdom, Belarus, and Georgia.

SpareBank 1 SR Bank ASA operates as a regional bank. The Bank offers a range of commercial and financial services to personal and corporate customers including deposits, loans, credit cards, money transfers, cash management, foreign exchange, insurance, online banking, and financial advisory services.

St. Galler Kantonalbank AG is a Swiss regional bank.  The Bank offers retail and commercial banking as well as private and institutional banking.  SGKB also provides asset management and financial planning services.  The Bank offers its services in the Canton of St. Gall through a network of branches.

Texas Capital Bancshares, Inc. is the holding company for Texas Capital Bank, NA.  The Bank attracts deposits from the general public and invests those funds in loans secured by single-family residential loans and commercial real estate, secured and unsecured commercial loans, and consumer loans.  The Bank's current primary market is the greater Dallas/Fort Worth metropolitan area.

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Texas Capital Bancshares (TCBI US)

US Financials: Energy Exposures Mean Boil, Boil, Toil and Trouble

After yesterday's halted trading, US banks could be due a nice bounce today as a risk-on bounce takes shape -if it does at all, or fades.US bank...

Paul Hollingworth

U. S. Banks Are Breaking Out -- Buy

Bank stocks are breaking out this week from base patterns, and are among one of the timeliest Groups in which to add exposure. The size of these...

Vermilion Research

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