![]() ![]() Our thesis has not changed, but on the margin, we now favor maintaining our large overweight to the US GSIBs, and we favor maintaining our significant underweight to the US regional banks even more. Here’s a breakdown of our outlook for both US and European banks. We continue to maintain a significant underweight to smaller, less-regulated financial entities such as US regional banks that we believe will face challenges in the current environment. We will maintain exposure to senior and, where appropriate, subordinated debt issued by large, well-regulated banks. We continue to believe that large, well-capitalized and highly regulated banks in the US and Europe are a compelling investment for bond holders across the capital structure. We expect projected earnings of GSIBs to increase year-over-year (YoY) to near-record levels in 2023 given higher rates and low credit losses. We believe the market will increasingly conclude that banking regulation has been largely successful for the highly regulated global systemically important banks (GSIBs), that regional bank business models will need to be de-risked, and that regulators have the tools, willingness, and ability to stabilize the banking system’s confidence crisis. Importantly, the ongoing banking crisis has triggered a broader concern for a potential recession and, depending on the day, outright contagion. The general consensus is that we face tighter financial conditions, greater regulation and increased costs to banks. The market appears to be in a price discovery phase trying to predict if the crisis can be contained or whether the contagion will spread. ![]() The current stress in the banking system is extremely complex, but in our view it is likely not systemic. European bank AT1s and (d) security structures and terms for various types of deeply subordinated securities. regional banks (c) US bank preferred securities vs. Europe (b) large, highly rated US banks vs. We believe markets will increasingly differentiate banks among regions and securities, as follows: (a) US vs. Regulators and bank managements have both learned valuable lessons and helped to significantly de-risk the banking business model since the global financial crisis (GFC), but more work needs to be done. Our established investment framework related to banks remains largely intact following several recent bank failures.
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