Controlling disruption exposure increasingly important in high-yield portfolios
After navigating through Q3, which historically tends to be a difficult quarter, several common themes are beginning to emerge across US money centre banks. Our thesis on the sector remains intact, with fundamentals continuing to improve despite pressure on revenues. Citigroup was the standout this quarter, but Bank of America lagged. Several years of the so-called zero interest rate policy are taking a toll on net interest incomes for the sector and forcing the banks into aggressive rounds of cost cutting. Regulation and oversight remains the main driver of industry fundamentals, credit profiles and spread movements. Senior and T2 issuances will likely increase on Orderly Liquidation Authority and Total Loss Absorbing Capital (TLAC) needs. We believe increased loss absorption capital will be positive for our bonds. P&Ls: Reported profitability did range from 7% of return on equity at Bank of America to 12% at Wells Fargo, which had the help of an outsized $0.9bn of equity gains Soft mortgage banking trends came to us as no surprise given further tightening of mortgage standards in the first half of the year, as well as lower volumes. We will be watching these mortgage lending standards closely, as mortgages represent a little less of 70% of US consumer debt and could be drag on GDP growth forcing the US Federal Reserve to keep rates lower for longer.