UBS believes the worries about U.S. banks facing major credit problems are likely being exaggerated. The firm said that even in a very severe situation, the losses from loans to nondepository financial institutions, or NDFIs, would still be easily manageable.
In its report, UBS mentioned that investors tend to panic whenever credit quality becomes a concern. Recent bankruptcies and negative credit updates have shaken confidence in bank stocks, especially regional ones.
UBS explained that most of this concern is focused on NDFI lending, which makes up around 14% of total loans under its watch. This type of lending has increased by about 60% across the banking industry since 2018.
To test the limits, UBS ran a “worst-case scenario,” assuming NDFI loan losses were as bad as what happened to commercial and industrial loans during the 2008 financial crisis. Even then, earnings per share would only fall by around 14%. In that same case, large national banks might see a 15% hit, and regional banks around 12%. If losses affected only half of those loans, the damage would drop to 8% and 7%, respectively.
UBS also said that the effect on tangible book value, a key measure of a bank’s financial health, would be very small. Banks would still stay profitable and continue growing their capital base.
The firm added that bank stocks often react more sharply to credit worries than the actual numbers justify. UBS encouraged investors to remain cautious but not avoid the entire banking sector. It highlighted JPMorgan among big banks and Huntington Bancshares among regional banks as strong performers.
UBS also said that Capital One seems far too undervalued and has been unfairly punished along with the rest of the sector.
