There's sort of two components here when we talk about the banks and I guess what
we want out of the banks right there is that extension of credit, I guess, to
the economy, to folks that need to borrow.
There is also the issue of capital returns to shareholders.
Yes. And that in Britain, armed conflict at
present in the US. U.S.
banks certainly at the regional level are under quite a bit of pressure.
And as long as the rates remain high, they have a serious problem, both their
assets and their liabilities, flight liabilities and not Mark Gurman and
assets. So what are they going to do?
I think they just just a race against time for them.
They've got to hold it all together. We think they're somewhat unsavory place
to be investing. At present, you would contrast European
banks over capitalized in general and and returning capital to shareholders
through dividends and share buybacks. That's you know, it's interesting to see
the turn of the tables after all those years and European banks being
underperformance versus the US that it has all changed.
Chris, I am curious, when we talk about economic conditions or at least we tried
to read the tea leaves about those economic conditions, might be we do know
that well, having credit basically banks lending money to consumers and to
businesses is a big part of the Greece of our economy here.
And there are concerns that that Greece just isn't there, at least not into the
level that we want it to be. Well, Romain, I think the banks have
really slowed down their corporate lending and their direct loan programs
as a result of the regulations that came in 2008.
But definitely being more conservative, the regional banks hold a lot of real
estate debt in office, real estate debt. And you guys have talked a lot today
about how the real estate market is due for write downs and declines in value.
That's going to put pressure on their balance sheets, as in some cases the
owners throw the keys at them. So I'm worried.
You know, there's still a lot of private credit that has now come in from
institutional investors into the market that can fill that financing gap.
Those rates of return look pretty attractive now that there really are
yields in fixed income. That said, I think the regional banks
are going to continue to feel pressure just because their natural market is
certainly compressed. They've got better interest rates to
help them, but it's going to be tough. That natural market is compressed right
now, Chris. So and you mentioned commercial real
estate. That's obviously a big focus as well.
But even Jay Powell, when he was on Capitol Hill this week, was asked about
the need for additional or I should say, higher capital requirements.
And he pretty much, at least in the way that Jay Powell speaks, a firm that.
He did, Romain, and I think that, you know, they would like to see stronger,
safer banks. We took a lot of time to look deep into
into Silicon Valley Bank and understand that exposure first Reserve Bank.
They really were outliers. When you look at the inflows and
outflows to banks, their capital structure, the regional banks, there are
some that are weak in some that are strong.
The money center banks really are in very good shape in the USDA.
So I don't think this is a banking crisis.
The stress tests will be painful for some, but I think the Fed really is
trying to watch it closely and keep the banking system supported.
Sarah, you're probably a little bit more of an active manager than what Chris
would be. I am curious, does what happened with
the banking crisis, the regional banking crisis back in March and the potential
sort of spectre of additional regulation?
Does that change your broader investment thesis overall?
No, it doesn't. We're value managers causeway in our
fundamental portfolios. International and global and work, no
matter where we are in the economic cycle, whether wearing it, the slowing
phase or an expansion, we're looking for companies engaged in operational
restructuring so that something has gone wrong with their earnings and that new
management or reformed management is there to fix it.
And we accelerate and and those companies exist all over the world.
So. So the current environment does not.
But but it doesn't help us when central banks get too accommodative and they
take rates down to zero because then there's no cost to capital.
Using a valuation approach becomes somewhat challenging and we are beyond
that. It's a new era now.
So it's very exciting to be involved in valuation work and find that our that
our tools are rewarded.