Skip to Content
Quarter-End Insights

Mixed Performance Ahead for Credit Sector

Consumer defensive should perform admirably while our enthusiasm for the industrials sector has cooled.

Mentioned: , , , , , , , , ,

Credit Sector Roundup
Banks
During the past quarter, large banks' credit spreads widened more than the index by approximately 10 to 20 basis points. This sell-off was driven by numerous factors including: potentially more restrictive capital requirements, the looming settlement from prior mortgage and foreclosure practices, the possibility of a weakening economy, and comments from the rating agencies about potential downgrades because of the loss of "too big to fail" status. One rating agency mentioned that some banks could even be lowered three to five notches when TBTF is removed. Compounding all these domestic issues was the looming possibility of a Greek sovereign debt default.

Overall, while many of these concerns are valid, we feel that they are accurately reflected in the relatively wide spreads of banks. More restrictive capital requirements on large banks would reduce overall profitability, but they would also serve to reduce the risks faced by bondholders. Although the economy has shown some signs of slowing, banks have not seen an increase in nonperforming loans and in fact have been able to reduce the amount of the nonperforming loans. Banks have also been steadily increasing their capital positions. Citigroup, for example, has raised its Tier 1 common ratio more than 200 basis points in the past year to 11.3%. We expect banks to continue building their capital ratios and should have little difficulty absorbing the effects of a slowing economy.

David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.