February 7, 2024
Today, with the exception of the US regional banks, fundamentals across the banking sector are the strongest they have been in decades.
Despite this, high issuance volumes, ongoing concerns over the US regional banking crisis, and macroeconomic uncertainty means the sector trades wide of the broader corporate bond market. Does this represent an opportunity?
Past results are not a guarantee of future results. OAS is option adjusted spread.
Source: Bloomberg. Data as at 31 December 2023
The market narrative has, in recent months, shifted towards an expectation that policy rates have now peaked and will soon fall as central banks achieve a soft landing. The banks are well placed for this scenario, with many having interest rate hedges in place to protect revenues.
Given the market often views banks as proxies for the macroeconomy, a reduction in recession risk should lead to renewed support for the sector.
Meanwhile, regulatory changes in light of the US regional banking crisis are likely to keep US bank issuance elevated in the next few years. In the longer term, however, the strengthening of banks’ capital positions as a result of these changes should be positive for bond holders. In the meantime, banks have a renewed focus on the quality and stickiness of their deposit base.
In this paper, Capital Group’s fixed income analysts outline what the changing macroeconomic environment might mean for the banks, the impact of the US regional bank crisis and the credit implications of regulatory changes, as well as the key opportunities and risks facing the sector.
Etrit Vllasalija is a fixed income investment analyst at Capital Group with research responsibility for IG European banks and aircraft leasing. He has nine years of investment industry experience and has been with Capital Group for six years. Earlier in his career at Capital, Etrit was a research associate. Prior to joining Capital, Etrit worked as an equity research analyst at Société Générale. He holds a master's degree from Jonkoping International Business School and a master's degree in finance from the Lund University School of Economics and Management. Etrit is based in London.
Franz Lathuillerie is a fixed income investment analyst at Capital Group with research responsibility for Asian financials in fixed income. He has 21 years of investment industry experience and has been with Capital Group for five years. Prior to joining Capital, Franz was CFO at AXA in Thailand and Indonesia. He holds an MBA from ESSEC Business School. He also holds the Chartered Global Management Accountant® designation and is a fellow of the Institute of Actuaries. Franz is based in Singapore.
Michael Habib is a fixed income investment analyst with nine years of investment industry experience (as of 12/31/2022). He holds an MBA from University of Chicago and a bachelor's degree from University of Western Ontario.
