Much concern about the health of banks seems concentrated at the moment on the unrealized losses in their holdings of bonds and other securities. Superficially, they do seem alarming – they can equate to more than 100% of the equity capital at some banks! But does this tip affected banks into insolvency? Not in our view, as there is another asset that has risen in value but isn’t on the balance sheet.
This is the deposit franchise – an intangible asset that represents the net present value of the future profits the bank will realise from not passing on all the increase in interest rates to customers. The essence of banking, after all, is making a spread between the interest you charge on your loans and the cost of your borrowing (including from depositors). So by focusing only on losses in their security books, we believe market participants are missing the real risks and are perhaps punishing the wrong banks.
Author:
Alan Bowe, Senior Credit Analyst, Man GLG