Uncertainties in the Credit Market: Analysis and Expectations

JPMorgan CEO Jamie Dimon recently expressed concerns regarding 'cockroach' fears in the credit markets, caused by the bankruptcies of automotive companies Tricolor Holdings and First Brands. However, MRB Partners analysts noted that the data shows solid credit metrics, indicating that the market remains robust.

MRB Partners highlighted in their latest report that the credit quality metrics of U.S. banks improved in the third quarter. They pointed out that key risk indicators, such as net charge-off rates, have declined in most of the largest lenders. Although the recent loss from Third Bancorp is linked to the Tricolor fraud, MRB considers this an isolated incident and anticipates that its impact will be limited.

While it is true that some banks saw an increase in poorly performing loan ratios in the third quarter, delinquency rates remain at low levels compared to historical standards. In fact, some lenders even released loan loss reserves due to 'better-than-expected credit performance.'

MRB states that there is substantial evidence suggesting that the systemic risks marked by recent scandals are contained. Household and business debt servicing burdens remain manageable, and the spread between high-yield and investment-grade bonds has narrowed. While banking sector credit default swaps remain stable, allowances for bad loans are still well above pre-pandemic levels.

However, it should not be overlooked that the fundamental health of the credit markets does not conceal areas of risk that require more attention. MRB notes that loans to private equity funds, real estate investment trusts (REITs), and mortgage lenders have been growing rapidly. Loans to these institutions account for nearly 11% of all banking loans, and it emphasizes that a significant portion of these positions has been assumed by large, diversified banks.

In conclusion, while the balance sheets of U.S. banks remain clean, MRB continues to carry an overweight position in large and diversified bank stocks, expecting that credit performance will remain strong as the economy improves.