January 4, 2023 | Premium Service | We begin the year 2023 with most financials down for the past year but hardly cheap by historical measures. The largest banks continue to serve as a haven for refugees from crypto fraud schemes and the fintech swoon, but this may be unwise except in limited cases. We anticipate that in the next 24 months financials will give up profits earned over the past two years, with shrinking book values, rising credit expenses and only slow return of earning assets to pre-COVID levels of return.
In the punishing environment created by the FOMC, the largest banks face a difficult road since they absorbed the majority of the reserves pumped into the banking system by Fed bond purchases. As we’ve documented using the data from FDIC, new bank lending was retarded during QE. As a growing number of researchers have noticed, QE may not actually even help the financial markets by increasing general market liquidity. Archarya and Rajan (2022) write:
“In times of stress, the demand for liquidity can significantly rise and liquid commercial banks, desiring to maintain unimpeachable balance sheets, may provide only limited re-intermediation of liquidity and contribute significantly to liquidity shortages.”
Given the prospect of higher interest rates and shrinking liquidity, we ponder the next group of banks below the top four moneycenter institutions, what we have named the “Half Ts” for banks near $500 billion in balance sheet assets. This includes Truist Financial (TFC), PNC Financial (PNC), Charles Schwab (SCHW) and U.S. Bancorp (USB), a group which deserves greater attention from investors and analysts.