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March 2023 / VIDEO

Navigating Risks and Tailwinds for U.S. Banks

Key Insights

  • To gauge the severity of potential credit risk among large banks, I pay close attention to the unemployment rate and trends in monthly credit card payments.
  • Inflation is likely to settle at higher levels than in the past, suggesting that a return to near-zero interest rates is unlikely.
  • Banks with strong balance sheets and plenty of capital should be well positioned to take advantage of favorable interest rates.


Hi, I’m Nina Gupta. I work on the financial services sector team, where I analyze large-cap U.S. banks and consumer lenders.

Before my investment experience began in 2003, I earned an accounting degree and an M.B.A. and worked as an auditor and consultant for large-cap banks.

The companies I cover are complex. Identifying opportunities in this space requires two lenses of analysis:

  • One focused on macro drivers, such as economic growth and interest rates;
  • And another focused on the fundamentals of individual companies.

Right now, questions about the severity and timing of a potential U.S. recession are top of mind because banks’ prospects are sensitive to economic conditions.

Historically, the unemployment rate has been an important indicator of potential credit losses.

Monthly data on credit cards can also provide an early glimpse on how consumer loan portfolios are faring.

Signs of stress include an uptick in late payments, rising balances, and declining payment rates.

In the past, stabilization in these trends has signaled that a recovery could be taking shape.

But each downturn is different.

In this particular one, auto loans could pose greater risk because used-vehicle prices spiked during the pandemic and underwriting was loose.

Office real estate exposure could be another area to monitor as more people work from home. I am currently working with our real estate team to identify loans that can be of higher risk.

Amid these economic challenges, I don’t want to lose sight of an underappreciated tailwind that banks could enjoy in the coming years:

  • Inflation is likely to settle at higher levels than in the past, suggesting that a return to near-zero interest rates is unlikely.

On the inflation front, easy solutions to the U.S. labor shortage will be hard to find.

Many workers have left the labor pool, and immigration levels have declined significantly since 2020.

Higher rates would be good for banks.

Banks borrow at shorter-term interest rates and lend at longer-term interest rates.

A wider spread between the rates paid on deposits and the rates banks earn on loans could support higher net interest income than during the past decade.

Banks with strong balance sheets and plenty of capital should be well positioned to take advantage of favorable interest rates.

The setup can be even better for banks that are improving their operational efficiency—for example, by automating more processes or taking advantage of a strong digital presence to shrink their branch network.

To frame the risk and potential opportunity, I spend a lot of time scrutinizing banks’ balance sheets.

Relative exposure to riskier loan categories is one consideration, and getting a sense of a bank’s underwriting standards is also helpful. For example, lower loan-to-value ratios on portfolios of mortgages and other secured loans can provide some cushion against losses.

For consumer and commercial loans, I look for stronger terms and restrictions.

Banks that have set aside extra capital will also be in a better position to manage risk.

No bank is immune to economic weakness. However, some will be better positioned to play offense in tough times and even more so when the economy improves.


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