Banks seem to have easily digested energy-related losses and are now well positioned to realize related recoveries with otherwise “low loss levels in an extending business cycle” according to a research note from Credit Suisse on the state the global credit market published at the end of last week noting how Credit Costs have decreased.
Credit Costs Have Reached A Cyclical Low
As the Federal Reserve begins its tightening cycle plenty of commentators are worried that higher interest rates will be bad news for the US economy as debt built up over the past decade will become harder to maintain.
On the topic of credit costs, Credit Suisse seems to agree with this viewpoint. The bank’s credit analysts Susan Roth Katzke believe that credit costs have now “passed their cyclical trough” and the predominant trend for interest rates across the board is now “upwards.” The one area of the market that might see some reprieve is on the commercial side of the credit cost equation.
But even though costs are set to increase, the analysts believe that despite the drag from energy losses banks stand to benefit from “low loss levels in an extending business cycle”. Compared to past business cycles the June 2009 to current cycle is the third longest in history but at 93 months is still several years shorter than the March 1991 to March 2001 business cycle.
Last year a rise in defaults was picked out as an indicator that the current business cycle could be nearing the end of its life. But Credit Suisse’s team believe this optic in default is nothing but a “bump in the road,” not the beginning of the end. Specifically, the team writes:
“History would suggest that it’s too soon for the banks to be approaching the point of a material upturn in net charge-off rates—the banking industry is only 16 quarters into what has historically been a period of 20+ quarters of very low loss rates in a cyclical recovery. We remain of the view that credit costs have passed their cyclical trough and the predominant trend is now upwards. That said, we can expect a near term reprieve, with commercial credit quality indicators stable and energy recovering.”
Declining high yield defaults and a rising credit rating upgrade/downgrade ratio further reinforce this case.
What’s also interesting, is that after peaking in 2016, US corporate leverage is now starting to decline.