BANKS: They are the third biggest sector in the S&P 500, its 2nd cheapest (after energy) and 2nd worst performing this year (after real estate). Driven by March’s small banks scare, the risks of a slowing economy and commercial real estate defaults, and now the prospect for tougher capital rules. This has more than offset net interest margin gains from higher interest rates, and strong buybacks and dividends. These new rules won’t come into effect for years but may keep pressuring highly regulated banks and benefit less regulated alternative lenders, or ‘shadow banks’. This has seen the likes of Apollo (APO) and Blackstone (BX) muscle in on banks’ traditional lending business, ‘dancing in the streets’ according to JP Morgan’ (JPM) CEO Dimon.
REGULATION: US regulators are proposing the 30-or-so largest banks, with over $100 billion of assets, carry 15-20% more capital as they locally implement new global Basel III rules. This is the biggest regulatory change since 2010 and could see the largest banks need to carry an extra $180 billion of capital. This is designed to make the banking system safer. But it may also reduce the profitability of many banks, requiring them to generate more profits to produce the same returns as today, and may also curb dividends and share buybacks. See @BigBanks.
COMPETITION: Non-banks include asset managers, insurers, money market funds, commodity traders, hedge funds, and private lenders. Combined they have outpaced traditional banks growth for years, and now account for fully half of all global financial assets. This has driven the outperformance of many, like our basket of listed private equity giants (see chart). But it is not without risks, given the lesser oversight but huge size and interconnectedness. See the 2022 UK pension fund stress that needed BoE intervention. See @Fin-Tech and @Private-Equity.
All data, figures & charts are valid as of 31/07/2023.