Tabbush Report

Banks - Credit, liquidity, market risk, in unison

Conference call with Daniel Tabbush

Daniel is very negative on almost all Bank stocks and believes that we are some way off peak crisis levels when comparing the situation today to GFC and 1990 recessions. US banks in particular have been running down reserves and will take more in the way of provision costs for further bad loans as well as have to replenish their loan reserves to more prudent levels. Credit costs as a percentage of loans, as a percentage of income or assets will be much higher in coming quarters. We are seeing surging drawdowns for example US banks CNI loans (commercial and industrial loans) where there has been huge growth in the last few weeks - over USD 300 billion. Banks have been forced to take on these liabilities for companies drawing down on committed facilities. They would only do this when there’s no liquidity, when the outlook looks dire; take for instance the travel and energy sectors. There is going to be a greater propensity of NPL formation from that surge in drawdown and there are capital constraints for banks with the transfer of funds from off balance sheets on to balance sheets and in very meaningful size. Investors should ‘watch the fringe’, not the bluechip banks who will be bailed out; look at some of the small US banks where credit card delinquency rates are very high - much higher than previous recessions and this data is before the shutdown.

Exponential Growth in NPLs across the world. Some banks are expensing 10 basis points of loans per year. Banks in Japan have had write backs for years and they’re only just starting to take tiny, tiny expenses for their bad loans. The banks in Australia and Japan stand out with having some of the lowest levels of credit costs to loans. The banks in Australia are unique as loan to deposit ratios are well over 100% and that means these banks are wholesale funded. This matters when there is a crisis as the lenders will want to limit their risk. Hugely rising credit costs for Japanese banks including Resona, MUFG, SMFG and Sumitomo Mitsui trust. Japan Post Bank invests in securities almost exclusively including a huge amount of US collateralised loan obligations, many of which have been downgraded from AA to CCC.

Interesting piece on banks and insurance companies beholden to the price of oil. For example banks in Singapore which have large energy-related loans, mostly in the oil and gas service sector. Highlights DBS, OCBC, UOB, Standard Chartered, HSBC, banks in Texas such as Comerica and Cadence. Hin Leong, Singapore oil trading company, recently uncovered as a major fraud and where ABN AMRO, DBS, HSBC are all facing colossal credit risk impairments.