Basel III Implementation In January 2013 Next Real Inflection Point For US Banks: No Meaningful Effect Forecast From US Debt Downgrade And European Sovereign Debt Crisis: An Interview With Christopher Mutascio Of Stifel, Nicolaus
August 8, 2011 - The Wall Street Transcript has just published US Banking Report: An Investor offering a timely review of the Banking sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Christopher Mutascio joined the research team at Stifel, Nicolaus & Co., Inc., in February 2007 covering large-cap banks. Before joining Stifel, he was with Credit Suisse, where he was appointed Director in equity research in August 2004, and followed the large-cap traditional banking sector. Previously, he spent seven years with Legg Mason, Inc., where he was a Managing Director and the company's Senior Bank Analyst.
Mr. Mutascio began his career as a Federal Bank Regulator with the Office of the Comptroller of the Currency, where he worked for six years, rising to the level of National Bank Examiner. Mr. Mutascio has an MBA from Loyola College and a bachelor's degree from Gettysburg College.
TWST: How is the macroeconomy impacting the money center banks?
Mr. Mutascio: From a macro perspective, I think that keeps people on edge, but that doesn't have a material impact on the bank's performance. For example, when you look at Greece, even the money center banks exposure to Greece specifically is just minimal.
The exposure to the PIIGS - Portugal, Ireland, Italy, Greece and Spain - is a little bit more meaningful for JPMorgan (JPM) and BofA (BAC), but very manageable. And you're talking $15 billion on your $2 trillion balance sheet, and it's just not going to make or break either JPMorgan or BofA. Does the European debt crisis manifest itself into a global recession or something of that nature? Possibly. From an indirect basis, you have more exposure there if the global economy were to slow and certainly affect the U.S. economy. But direct exposure to Greece specifically or the PIIGS generally just isn't going to make or break the U.S. banks.
If something is going to happen on the debt ceiling, I think people are less concerned about a default because it is not likely to happen. But there is some concern about a downgrade and its potential impact on yields. However, so far yields are going down, not up. Look at the 10-year Treasury. The 10-year Treasury is down 10 basis points today. The question that we get is "Will the downgrade impact capital at the banking sector?" In other words, "Would you risk-weight U.S. debt differently?" And the answer right now is no.
The U.S. Treasury has a zero risk weighting, and it's not just because of the AAA rating, because that's not all that goes into risk weightings. If it was just a AAA rating, then you'd see large corporate bonds that have AAA-rating status be risk-weighted at a zero weighting, but they don't, they are higher than that. It's the sovereign debt that gives the U.S. a zero risk weighting, and they will maintain that zero risk weighting. That's not going to change for the banks. So until Basel III is implemented, which is not until January 2013, a downgrade from the U.S. debt - I don't think has a material impact on the banks whatsoever from a debt perspective.
There are potential indirect issues that could arise with a U.S. debt downgrade. Does that create havoc in money market account funds? Does it create volatility? Do certain funds have to punt the U.S. Treasuries because they are no longer AAA-rated and their bylaws say they have to have AAA rating? Maybe, but the U.S. debt market is the largest and most liquid fixed income market in the world, so I just don't think people will do that. What they'll perhaps do is change the bylaws that they can own U.S. Treasuries as well, even if they lose their AAA-rating status. So I don't want to be a nonalarmist, but the way I see a downgrade of the U.S. Treasuries from a AAA to AA - I'm just not so sure that's all that meaningful to the banks.
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