As the crisis with First Republic was no sooner over than we were talking about
Pack West and Western Alliance. And then we got word that the T.D.
Bank deal for First Horizon was off. We asked Thorsten Slack of Apollo for
his take on why regional banks were having such a tough time of it.
And he answered with one of his famous charts.
What is noteworthy is what has happened since late February.
Since then, we have seen the interest rate on three month C.D.
go up for small banks and go down for large banks, specifically small banks
raising interest rates on cities because they're trying to attract deposits,
whereas large banks have actually been lowering interest rates on cities
because they have more than enough deposits.
And this discrepancy is highly unusual. If you go back in time, because normally
both large banks and small banks move interest rates up together or down
together. But what is really unique about this
situation is how smaller banks have had to increase interest rates on cities and
interest rates on deposits to attract deposits to these institutions.
The implication, of course, for profitability is that, well, if this now
continues for quite an extended period, the implication is that profitability in
the smaller and the regional banks is going to be more under pressure simply
because to have to raise interest rates, to attract more money, to get deposits
only applies with capital. And Su Keenan Subramanian of Bank of
America are still with us. So let to start with you.
We heard earlier from the reference to credit, not a crunch, but tightening
sort of credit. What could that mean for equities?
Yeah, I mean, I think it's so. Credit crunches are usually negative for
equities, I think in this case. It's not gonna be what we expect.
And, you know, normally banks and financials got hurt the most.
But if you think about the last 10 years, the lenders haven't necessarily
been the big cities that the regulated banks.
It's been more regionals. It's also been, you know, private equity
venture capital companies raising debt. I think what's also interesting is that
the money that companies are raising isn't necessarily it hasn't gone to
CapEx and building stuff that's really gone to share buybacks and maybe tech
CapEx. So I think this credit crunch is going
to look very different from what folks are gearing to.
You know, the idea that CapEx is going to trend lower consumption is going to
trend lower. Consumers and corporates are actually
really healthy. We haven't seen a real CapEx cycle in a
very long time. We haven't seen money spent on
productivity and efficiency. So I think that's the theme that we're
focused on when it comes to the banks. I think dispersion is very important and
it's actually a great time to be, Ellen, where you're picking securities because
I really feel like this is a stock pickers market.
Large banks are very different animals right now.
They've been regulated and watched by the government.
They've been disallowed from taking on a lot of risk and are sitting in a much
better position. You know, I think that for both ends of
the spectrum, the secular challenge for banks is going to be giving back higher
rates to consumers. But, you know, as Thornton's chart
shows, there is clearly a difference in terms of the lay of the land right now.
Ellen Stewart, the CBO says, is your market.
You're the stock picker. So what stocks are you picking
up? There's plenty to choose from.
But just on the regional bank situation, I would dig deeper and say what Dawson
talked about is absolutely true. Cost the funding.
Regional banks are going up. They have been long beneficiaries of
looser regulation. That's changing.
And there are more options for deposit holders to move money to other places
where they'll get a higher yield. So we can easily say regional banks are
challenged, but a stock bank or like us, we're going to do the work and figure
out which banks have healthy capital ratio, which enables them to have a
lower cost of funding. And also, we're going to look at the
deposit base. The more granular the deposit base is,
the secure the deposit. I mean, one of the reasons why I say BP
was challenged was their average deposit was in the six digits.
So when rates go up, that deposit is more vulnerable to seek yield and
returns elsewhere. So when you're looking at regional banks
for stock pick or like us, we are gonna be doing the work to find areas where
there will be opportunities and price this location.
And on another theme in terms stop banking, we are finding areas where
there are good operational restructuring stories as well as Leighton Colbert.
Recovery names like Rolls Royce stock is up 70 percent despite what's happening
in the banking market in the first quarter.
And then thirdly, I would also talk about, you know, the beat I mentioned
earlier about companies beating earnings.
There are areas where companies have specific idiosyncratic risks, where it
has been underappreciated. And when those companies beat, the
market is rewarding them very handsomely.
So it's a view that as you look at equities, are there some idiosyncratic
areas particular when it comes to credit, they're getting hit worse than
others. I mean, everybody's interest rates are
going up, but it may hit some companies differently from others.
Yeah, I'm. So, you know, one of the big surprises
to me is when you look at some of these so-called defensive areas of the market,
like health care or telecom, the the the credit risk is actually higher than you
would expect. Whereas energy, materials, commodities,
which are typically, you know, kind of at the epicenter of most credit
downturns are in a much better position. They've been deprived of capital for
many, many years. They've become very disciplined about
cash return and balance sheets and capital allocation, whereas the
companies that have gotten more easy money might not be in as great a
position to handle this market increase in interest rates.
So, you know, health care was. I think it's the fourth highest industry
in terms of floating rate risk sitting on balance sheets, which means they're
going to face that move in debt a lot faster than other sector.
I didn't know that quickly here at the NFL.
And you like Europe when it comes to security.
Why is that? Well, first of all, Europe valuation is
much more attractive, resists us. Secondly, in terms of a higher rate
interest, higher interest rate environment, that should be
advantageous. And thirdly, think about the energy
crisis that Europe is going through right now.
And they have to shift their energy infrastructure, which is a very
strategic element, the economy. So that spending is going to continue.
And not only that, they are leading the efforts on decarbonisation.
And again, that will act as a fiscal stimulus for the growth of the economy.
And again, Europe has had very little spending in infrastructure in the last
30 years. So we this, again, will work in the
favor of companies that are in energy and industrials to fuel economic growth
in the next decade.