Outside of the US regional banks, fundamentals within the banking sector are the strongest they have been in decades, and yet because of high issuance volumes, ongoing concerns over the US regional bank crisis, and uncertainty about the future economic trajectory, they continue to trade wide of the broader corporate bond market.
As the below chart shows, the sector begins 2024 with credit spreads wider than the broader investment grade market. We currently have a favourable view of the sector, and any future volatility is, in our view, likely to provide an opportunity to build exposure.
Banks are currently priced with a spread over investment grade credit
OAS comparison of Global Aggregate Corporate - Banking and Global Aggregate Corporate
Past results are not a guarantee of future results. OAS is option adjusted spread. Source: Bloomberg. Data as at 31 December 2023
The macroeconomic environment had an important influence on bank credit results in 2023, and it is set to continue to do so through 2024. Market expectations have shifted from a policy rates will remain higher-for-longer narrative towards anticipating a soft landing scenario in which inflation continues to fall towards target and rates are eased.
At the same time, while the global economy has remained resilient and a recession has been avoided so far in the US and Europe, the risk of one occurring has not gone away. Given that the market often treats banks as proxies for the macroeconomy, a reduction in recession risk should lead to renewed support for the sector. Looking ahead, although banks are generally well positioned for all three outcomes, some are more favourable than others.
Meanwhile, regulatory changes in light of the US regional banking crisis should keep US bank issuance elevated in the next few years. However, in the long term, strengthening banks' capital positions due to these changes should be positive for bond investors. In the meantime, banks have a renewed focus on the quality and stickiness of their deposit base.
In this paper, Capital Group's fixed income analysts outline what the changing macroeconomic environment might mean for the banks, the impact of the US regional bank crisis and the credit implications of regulatory changes, as well as the key opportunities and risks facing the sector.
