In a report last week, we examined the outlook for U.S. bank stocks and the banking industry as a whole in view of the bearish news in the private credit space “U.S. Bank Stocks: How Big Of A Threat Is Private Credit?”.
Indeed, bank lending to non-depository financial institutions has grown rapidly in the past decade. However, loans to credit intermediaries are still a small share of total bank assets and hence do not pose a systemic risk to the banking system. Moreover, the overall asset quality of banks has remained benign despite some well-publicized corporate bankruptcies. In addition, U.S. banks have ample buffers in the form of capital, reserves, and operating profits.
A full-fledged default cycle is unlikely to develop if the economic expansion continues, as we expect. To this end, the behavior of corporate credit spreads is consistent with our still constructive economic outlook. Accordingly, we expect bank earnings to remain resilient.
