January 30, 2025 | Premium Service | Last night we took the quarterly snapshot of the US banking industry that results in the WGA Bank Top 100 indices. The new indices will be live on Monday February 3, 2025 thanks to our index agent Thematic. There were only 104 banks in the WGA test group this quarter vs 106 in Q4 2024, reflecting industry M&A activity. Subscribers to the Annual Service of The Institutional Risk Analyst have access to the index constituents and weightings. Our next conference call with Annual Service subscribers is later today.
As banks plough into the uncertain business environment of Q1 2025, we continue to see and hear signs of pretty dire distress in commercial credit, reflecting the idiosyncratic nature of this private asset class. The opacity of private equity and debt markets masks the pain, but the financial and economic pain still does exist, creating challenges for risk managers. High borrowing costs are testing the thesis that says private equity and debt are less volatile than public securities, notes Nom de Plumber. Eventually the Fed will notice.
“We believe the pain from rising interest rates has not been reflected in pricing” of CRE CLOs yet, said Daniel McNamara, Polpo Capital Management founder, in a timely Bloomberg report. “While we are hearing more calls that the bottom is here in commercial real estate, we think that’s a tad premature and believe the next couple years will be a bumpy ride with a lot of pockets of distress.” The chart below shows credit costs on the $1.2 trillion in bank owned, non-owner occupied commercial real estate loans.
Source: FDIC
Perhaps the biggest red flag for investors outside of the obvious signs of stress in commercial credit is the pivot by the FOMC to a “wait and see” posture. With liquidity levels in the money markets dwindling and banks reducing lines of credit to commercial developers, the stage is set for some troubling years of loss recognition.
Fed Chairman Powell says that QT will continue? Really? Remember that the Fed's models for ST market liquidity are notoriously dysfunctional. We think an unexpected blowup in credit markets could force the Fed to significantly reduce interest rates, but in the meantime its higher for longer for mortgage lenders, both residential and commercial.
The WGA Bank Top 100