Credit crunch coming? Analyses
How likely is a new credit crunch and what are the risks for banks? The analysis by Andrea Delitala, Head of Euro Multi Asset, and Marco Piersimoni, Senior Investment Manager, of Pictet Asset Management
In the last year and a half, banks have begun to adopt a much more restrictive policy with regard to the granting of new credit: US data show not only a reduction in credit growth year on year but also a negative growth in the last quarter, to the extent of -37.2%. A similar trend is also clearly visible in Europe.
The reduction above all regards American regional banks which play a very important role in certain economic sectors and above all in the financing of commercial real estate, which has significant dimensions both in the United States and in Europe. The latter, in particular, exceeds 10,000 billion dollars in value in the USA, reaching around 9,000 billion in Europe.
Are we risking a credit crunch?
Given the current environment, we are not yet facing a credit crunch, but more likely only a credit tightening in specific sectors, such as commercial real estate. For sector operators facing significant debt refinancing or exposed to variable interest rates, the risk is that the interest payable on the debt is higher than what is collected mainly from office rents. We are certainly not heading towards a new 2008, as the value of these properties is not as high as that of residential properties and because the loan to value ratio is much lower. For these reasons, we could see reductions in available credit but not problems of recapitalization of the banking system in a generalized way.
Another area to watch is that of non-investment grade trade credit which has grown a lot in recent years with very low default rates, prompting banks to increase their exposure. In the same period, however, there has also been the entry of new, non-banking operators: funds, bonds and fintechs. This moderates the direct risk that banks have towards low-quality trade credit, but on the other hand has significantly increased banks' exposure to non-bank financial operators with a CAGR of 9% from 2011 to 2021.
The other item under the radar: capital
The restrictive policies of central banks led to large losses not accounted for in the banks' balance sheets. This is especially a problem for US regional banks; for European banks, the problem is less as, due to a regulatory issue, these losses are partly already accounted for. If the losses do not depend on a forced exit of deposits, in which the banks are forced to sell a securities portfolio, these may be reversed when the securities reach maturity and are liquidated at book value. Without considering that any holes could be compensated for by liquidity injections by central banks.
While essentially under control, we believe the Silicon Valley Bank crisis will have a number of consequences for the banking system. In particular, we expect:
- increased regulation;
- an increase in taxation;
- even more stringent stress tests with possible lower returns on capital for shareholders;
- a credit crunch and rising credit losses;
- pressure on interest margins due to higher funding costs;
- lower profitability and a higher cost of capital.
Especially in the United States we expect an increase in bank mergers, especially with regard to regional banks whose business model is at risk of sustainability.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/credit-crunch-in-arrivo/ on Sun, 14 May 2023 05:29:25 +0000.