Chris Wheeler is a U.S. bank analyst for Atlantic Equities. He has 36 years of experience working in or around the bank sector and is a frequent guest on Bloomberg TV and CNBC. ETF.com recently caught up with Wheeler to get his take on the recent decline in bank stocks in the U.S. and Europe.
ETF.com: Financials are the worst-performing sector this year, and banks in particular have been some of the worst-performing stocks. Why is that?
Christopher Wheeler: If you chart some of the big banks against the oil price, you'll find there's a really close correlation. If you put on the same chart the gap between the 10-year and the two-year [Treasury], you'll see exactly the same situation.
It's fairly clear that energy has played a massive part in this sell-off in the banks. In some ways, that's slightly bizarre, given the fact that exposure to energy is between 2% and 4% of total loans, which is as you'd expect and manageable.
Of course, it certainly hurt profits last year, and it will hurt profits this year, but it hasn't destroyed earnings or crushed capital.
But it wasn't just the energy price. It was the whole interest rate saga of people panicking about the fact that the Fed wasn’t going to raise rates this year at the rate at which they thought. And then you saw this narrowing of the 10-year and the two-year [Treasurys]. That caused people to start talking about how the borrowing-short/lending-long model seems to be broken.
Then you have to lay on top of that concerns about the emerging markets. Take for instance, today's results from HSBC. Revenues were weak on the back of a slowdown in their corporate and commercial activity in mainland China and Hong Kong. That's another factor.
Along with emerging market concerns, there are also the issues of global growth and negative interest rates. You have all these unknowns stacking up this year.
ETF.com: As bad as the performance of U.S. banks has been, it's been much worse in Europe, where some of the big names are at multidecade lows. How bad are the fundamentals over there?
Wheeler: The U.S. banks got their act together much more quickly following the financial crisis. You had the creation of Dodd-Frank, followed by the stress tests in 2010 onward.
In Europe, the banks are far behind the curve. Banks like Deutsche, Barclays and Credit Suisse hoped the markets would bail them out with new investment banking businesses. They thought the revenues would come back and they'd be fine. But they haven't.
What we have now is the second and third phase of restructuring. These banks are cutting costs and reducing their capital in terms of risk-weighted assets. And they're doing that into difficult markets.
What you're seeing is investors looking at these banks and looking at all the bad news― European growth completely stalled, emerging markets stalled and negative interest rates in Europe―piling on top of the fact that they’re still in major restructuring.
Deutsche's got four years to complete its restructuring; Credit Suisse probably has another three; and there's a similar story for Barclays.
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ETF.com: The outlook for European banks certainly sounds challenging, but do you see a buying opportunity in the U.S. banks?
Wheeler: Financials are 16% of the market, so it's very difficult not to own banks. Investors can go underweight, but they can't have zero weighting in the sector.
Thus, investors are focusing much more on the really high-quality names, where they feel totally confident. People are looking at the J.P. Morgans and the U.S. Bancorps of this world, and some of the other regional banking names I don't cover.
I'm a bull on First Republic, which is a bank with fairly low-risk profile, very-high-growth potential.
ETF.com: In general, how do the regional banks compare with the national banks?
Wheeler: It's a mixture. Some of the regional banks are much more exposed in terms of the possible energy losses they could take.
On the other hand, they don't have to worry about the international markets as much, about the strength of the dollar or the declining Chinese economy. Although, some of their customers are going to be hurt by that if they have exports to China.
But net/net, they avoid worries about European growth and all that kind of stuff. They're focused much more on the domestic story, as they all should be.
In some cases―for example, with the Texas banks―people are raising questions about their exposure to energy. Obviously, that’s a worry.
There are so many banks out there. You don't have to own one that has above-average exposure to energy. Why would you bother? The big banks like a J.P. Morgan or a Citi have only a small fraction of their loan book tied to energy. That's what you'd expect in a diversified institution that's regulated by the Fed. You're not going to end up with 20% exposure to energy with those names.
Contact Sumit Roy at [email protected].