Peter Plaut is our Viola Risk Advisors collaborator covering Global Multi-Asset Strategies across investment grade corporate bonds, high yield & distressed bonds, real estate development projects, litigation finance, toll roads and other illiquid private placements. His debut article discusses the hoped for recovery in the global hospitality industry.
The virus has stressed the financial system with systemic risk never seen before. Most bigger banks can survive with capital structure intact. COF, GS should have major difficulties maintaining common stock dividend. Perpetual preferreds are a better investment play. Expect major survivor mergers with Citi, Walmart, Amazon, PNC, USB as the stronger hands.
US regional banks will suffer from the decline in lending and transaction activity and the rise in loan losses despite government/central bank stimulus. Capital One most at risk with large card book. Citizens Financial and Regions in the large bank sector with runaway other consumer loan growth at risk.
Viola Risk stress tests for big declines in economic earnings as the economy contracts due to the Covid-19 virus. US banks look the strongest counterparties but will still be impacted. Canadians can weaken further than US. Europeans have dismal protections against earnings dropoffs. Europeans presented most counterparty and systemic risk.
COVID-19 is a wildcard event for public health, the real economy and financial markets. We explore the impacts from a material GDP contraction and impacts to asset volumes and credit deterioration. Spreads have gapped 150 bps for US big banks, but still not time to Buy. Counterparty & Regulatory risk amplified to Medium to High levels.
The stock/bond markets have been rocked by Fed rate cuts related to the virus. We look at the impacts to margins and interest income for the big US banks. JPMorgan and BAC less impacted but still difficult. Wells Fargo is most stressed with Citigroup a mixed bag.
US regional banks are still weighing the "merger versus go it alone strategy" with digital banking investment spending a critical part of the calculus. We explore how USB and PNC are contemplating these dynamics in the wake of the Truist deal that recently closed.
Consumer lending has been the high margin business for banks and other lenders. We explore the potential inflection points that could lead to higher losses by credit sector and user group.
2020 could be another year of credit hibernation. But investors need to stay on top of the relevant trigger points deciding when to make strategic decisions. US bank spreads seem too rich, though equities could rally higher in low rates environment. We explore systemic risk triggers in US, Europe and Asia.
DFAST 2019 waved the white flag for shareholder payouts manna. Still, if every bank passes what is the value of the tests? We explore the inadequacies of identifying the real world risks across volatility, leveraged lending, structure and securitization risks that the stress tests may miss.