The US banking industry could face a significant drop in stock prices within the next 16 months if the economy enters a recession, according to macro guru Hugh Hendry.
Summary: The number of corporate bankruptcies in the US is increasing, with over 400 corporations going under so far in 2023, which is the fastest pace since 2010 and double the level from last year, largely due to overstretched balance sheets and interest rate hikes. Sectors with high debt, such as consumer discretionary and industrial, are the most affected, and there have been 16 billion-dollar bankruptcies including Bed Bath & Beyond and the parent company of Silicon Valley Bank. However, some companies have been resilient due to stronger profits and the structure of corporate debt.
Shark Tank investor Kevin O'Leary predicts that high interest rates will cause chaos in the US economy, particularly impacting commercial real estate, banking, and small businesses, which make up 60% of jobs in America.
The collapse of Silicon Valley Bank and the subsequent regional banking crisis has resulted in major economic and regulatory repercussions for banks worldwide; however, some major banks, such as UBS and JPMorgan, are emerging as clear winners with record-high profits after making strategic acquisitions.
The US banking industry faces significant downside risks from inflation and high interest rates, which could weaken profitability and credit quality, according to FDIC Chair Martin Gruenberg.
The US banking industry is experiencing signs of stress, with second-quarter earnings dropping 11.3% due to bank failures, while declining interest rates and rising costs pose challenges for profitability, according to the Federal Deposit Insurance Corp.
The US banking system is expected to undergo a major consolidation as confidence in the financial sector wanes, with regional banks likely to decrease by half in the coming years, according to Kevin O'Leary, a venture capitalist from Shark Tank. People are withdrawing money from banks due to concerns over potential failures and the limited guarantee on deposits, leading to a drop in total deposits for five consecutive quarters.
Despite bond rating agencies issuing warnings and downgrades for banks in the US, equity analysts argue that the warnings were inaccurate due to rising bank stock prices and better-than-expected earnings reports. However, the regional banking sector has still experienced a significant decline this year and faces uncertainty regarding the future role of banks in providing credit to the economy. Additionally, the debate about banks revolves around interest rates and the state of real estate, particularly office buildings.
The crashing office real estate market in America's largest cities is putting them at risk of an economic "doom loop" with potential consequences including higher tax rates, property value declines, and financial trouble for banks.
US banks are experiencing significant deposit outflows, with total bank deposits plunging by over $70 billion in a week, the lowest levels since May, leading to concerns about the ongoing regional banking crisis; meanwhile, US commercial banks have also suffered significant losses in deposits, with 60% of deposits moving to higher-yielding money market funds, and the balance of unrealized losses on securities at commercial banks rising to $558 billion in Q2; to address these issues, the Federal Reserve has reached an all-time high of $107.8 billion in its banking loan facility to provide funding to distressed banks.
The Federal Reserve has surpassed $100 billion in losses, and experts predict that the losses could potentially double before they start to decrease, as the central bank continues to pay out more in interest costs than it earns from bonds and financial sector services.
In the past year, America's four largest banks have lost hundreds of billions of dollars in deposits, with approximately 30% of the total exiting JPMorgan, Bank of America, Wells Fargo, and Citi, indicating a decline in trust in the banking system and a potential mass consolidation of regional banks in the US.
