Markets

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Executives at Wall Street's biggest banks have a story and they're sticking to it. 

The talking points are that the deterioration in credit quality still involves only energy and mining companies and poses no real threat of contagion to other industries. Bank of America's head of commercial banking, Alastair Borthwick, was the latest to make the case in his presentation at the Credit Suisse financial services conference: 

At this point the indicators from our loan book tell us this is localized to energy. And it makes it feel like it's more of a supply-side phenomenon which obviously benefits certain of the oil users in our portfolio. We don’t at this point see anything on the demand side that would leads us to the conclusion that we're necessarily in a recession. 

Comments like these, similar to remarks from JPMorgan Chase CEO Jamie Dimon and others during the earnings season, should ease investors' minds. But they're not. Bank stocks in the U.S. fell again Wednesday, even as one focal point of concern -- Deutsche Bank -- received at least a temporary reprieve. The freefall in shares of Germany's biggest bank paused amid reports that it was considering a bond buyback to help ease investor concerns about its finances, though they were falling again on Thursday.  

There are other sources of concern, of course. A much anticipated pickup in the yield curve that would help bolster lending margins never materialized. In fact, the difference between two-year and 10-year rates fell on Wednesday to the lowest level since 2007.

Flattening Fast
The difference between 2-year and 10-year Treasury yields is at the lowest since 2007.
Source: Bloomberg data
Note: In basis points. 100 basis points = 1 pecentage point.

Also, volatility in stocks continues to stymie capital markets activity. And maybe there's a little bit of #FeelTheBern going on as presidential candidates continue to bash big banks. 

The resulting bear market in banks has left literally every company in the Bloomberg Intelligence Global Investment Banks Competitive Peer Group index trading for less than book value, or the value of its assets minus liabilities:

Talking Their Book
Major investment banks around the world are trading for less than book value.
Source: Bloomberg data.

This, obviously, has some value-oriented investors salivating, even as others are still trying to climb out of the energy-company value trap they fell in last year. 

It's worth noting that bank executives do not seem to be too worried (at least on the record) about a potential turn in the credit cycle that corporate-bond markets may be signaling. Banks don't have to recognize the damage until payments on loans stop coming in, but investors in corporate debt markets can and have rendered their opinions in real time so the spreads in yields above risk-free Treasuries have widened. An iShares exchange-traded fund that tracks investment-grade debt is trading near the lowest level since 2013, and junk-bond ETFs are at the lowest levels since 2009. 

Also, way more ratings are being downgraded than upgraded. It's probably not surprising that S&P downgraded 95 energy-industry ratings and only upgraded two so far this year. Yet downgrades are outpacing upgrades in other industries, too: 

Uptick in Downgrades
S&P is doing more ratings downgrades than upgrades in most industries in the U.S.
Source: Bloomberg data

That's dragged the quarter-to-date ratio of upgrades to downgrades in all industries to the lowest level since 2009: 

Wrong Direction
The ratio of S&P ratings upgrades to downgrades in the U.S. is at the lowest level since 2009.
Source: Bloomberg data
Note: Current quarter figure is as of 2/10

Certainly, the bond market convulsion could be exaggerated and the bank executives could be proved correct that the credit cycle hasn't soured outside of energy. But at this point, investors in bank stocks don't seem to be willing to take any chances.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net