US Banks: No one wants free money?3 May, 2011, 21:48. Posted by BM
Tags: Banks, United States
Interest rates in the US are low, very low, and money is almost for free. In theory, low interest rates should stimulate the economy as more people borrow and build. Unfortunately this seems to have broken down in the US, which is suffering from a balance sheet recession.
Whilst in 2008/09 the concerns were centred around asset quality, the problem is now excess liquidity, which are dragging down the net interest margins. In the Q1 results for US banks, they are struggling to grow their loan book. But why? When interest rates are so low money is almost for free, one would expect these banks to show strong credit growth, which has not come through. The reality is that in an era of deleveraging, no one wants to borrow, everyone wants to reduce debt.
In the past decade, the loan book for banks have swollen. The volume growth drove high ROEs, which supported high P/B multiples. With a lack of appetite for credit in the economy, it’s a struggle to grow the loan book. We also need to take into account that around 15% of the loan book of US banks are ring-fenced run-off books, which makes growth even more difficult.
In 2009 banks were the key beta play on recovery, but the normalization trade has now long been done. Unless the US economy improves dramatically, it is difficult to see any growth in these banks, they are becoming more and more like utilities these days.
So, probably not a bad idea to take these banks off your watch list for now: it is a waste of time.