(Bloomberg) -- A new proprietary model points to rising commercial and industrial lending losses in the second half of this year, putting earnings at risk, according to UBS.
“While investor focus has been on net interest margin (NIM) pressure from lower rates, the model suggests that higher credit costs are an underappreciated risk,” analyst Saul Martinez wrote in a note. Each 20 basis-point increase in commercial and industrial, known as C&I, losses would hurt 2020 earnings per share by 2%-4%, he said, with mid-cap banks, such as Texas Capital Bancshares Inc. and BankUnited Inc., generally more at risk than large caps.
Why are net charge-off rates likely to rise? “Things are simply getting less good,” Martinez wrote. “Loan growth is slowing, delinquency rates have risen, the PMI new orders index has fallen from high levels and the Fed Loan Officer Survey shows modestly tighter underwriting conditions.” To be sure, none of these measures are at “alarming levels, but all have softened,” he said.
Money-center banks and Wells Fargo & Co. have “revenue diversification” that may give them deeper cushions, he said. UBS analysis shows less of an impact to earnings from higher loan losses for Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo than for regional banks.
Most large-cap regional banks are growing C&I loans more slowly than the rest of the industry, the analyst said, though he's keeping an eye on KeyCorp and Regions Financial Corp., as they have big C&I concentrations, faster-than-peer growth, and higher yields.
Bank stocks gained along with the broader market in mid-Monday trading, buoyed by optimism about a U.S.-China trade truce and easing tensions with North Korea. The KBW Bank Index rallied as much as 1.8% to the highest since early May, led by BofA, JPMorgan, Northern Trust Corp. and First Republic Bank.
Citigroup, which rose as much as 2.3% intraday, kicks off quarterly bank earnings reports on July 15, followed by JPMorgan on July 16.
Read more: Mike Mayo Says ‘Move Over Utilities' as Banks Ace Stress Tests
To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net
To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jeremy R. Cooke
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