The difficulties facing the US corporate sector and consumer are having a knock on effect on banking...
The difficulties facing the US corporate sector and consumer are having a knock on effect on banking stocks.
The banks are less keen to lend to businesses and domestic demand is weakening although the mortgage refinancing market remains strong.
Simon Laing, co-manager of the Newton US Equity fund, says revenue growth for US banks has lately been coming from deposits and mortgage refinancing, which has experienced an unprecedented increase.
'Because of the lack of confidence in the equity markets, investors are transferring their money into deposit accounts. Consumer expenditure has not stopped but has flattened. On the other hand, there has been no significant take-up on corporate loans,' he says.
In this climate, managers are unsure whether corporate loans will pick up after the war. Elaine Crichton, US investment manager at Aegon Asset Management, says: 'The big debate in the financial services sector is whether or not it is the right time to rebalance a portfolio away from consumer-oriented banks and have more holdings in banks with corporate exposure.'
However Crichton notes most corporates are still in the process of tidying up their accounts and paying off loans, while the consumer sector is nearing the end of its cycle.
Although the growth rate in the consumer sector is slowing, Aberdeen head of North American equities Alex Ingham says bad debts have been stable so far, which shows that customers have been paying off their credit card bills.
Because the US economy is expected to continue to slow down this year, there is concern the number of bad loans is set to rise. Laing says although there are no worrying trends in consumer credit at present, consumers might be stretching themselves by taking up extended mortgage refinancing as unemployment increases.
Although the mortgage refinancing sector remains strong, Laing adds it is in its third wave of growth and there is concern that it will not last long.
Another concern for US banks is the flattening of the yield curve. The 55-year low in interest rates is not helping the banks, according to Laing, who says they are unable to profit from long-term lending rates which are only slightly above the short-term rates at which they borrow money in the wholesale market.
Moreover, US investors initially thought the war with Iraq might be over within days but are now having to adjust to the idea of a longer-duration conflict.
Ingham says this poses some concern over the volatility of equities for the US financial sector. He adds: 'Continued market volatility would strain the balance sheet of most banks and would slow corporate loan growth and consumer loan growth because people and businesses do not want to borrow money in times of uncertainty.'
However he also notes the S&P 500 was back to its normal trading level of around 880 points on 24 March, from a low of 800 points on 11 March.
Within the financial services sector, Crichton favours brokerage companies like Goldman Sachs, Morgan Stanley and Merrill Lynch because she thinks they will benefit from bonds trading and a rise in market volumes as the war draws to an end.
Mortgage refinancing remains strong.
Bad debts remain stable.
Markets stabilising from 11 March low.
No market for corporate credit.
Yield curve flattening.
Consumer market wearing down.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress