Daily Update: July 7, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

US Banks Face Stress Tests and Funding Pressures

It’s hard out here for a bank. US banks are confronting a year in which three high-profile failures have made funding tighter, deposits harder to come by, and regulators jittery and demanding. Given the surprising resilience of the US economy and additional income from higher interest rates, US banks might be feeling bullish. But pressures are particularly acute for some of the smaller, regional banks that find themselves caught between wary depositors and demanding regulators. New capital requirements and hypothetical reverse stress tests are increasing the burden many banks are feeling. 

The Federal Reserve’s recently completed stress tests on 23 of the largest US banks may trigger additional funding requirements for some lenders. The test results were published June 28, and initial expectations were for broad upward pressure on capital requirements given the failures of several banks in 2023. However, the tests showed smaller hypothetical losses compared with 2022. The tests focused on potential losses from commercial real estate and the possibility of a severe recession. Several banks including Bank of America, JPMorgan Chase, Wells Fargo and M&T Bank will likely face lower capital requirements. But Citigroup, Capital One Financial and Citizens Financial Group may encounter additional capital requirements following the tests. 

Federal Reserve stress tests are only required for larger banks. This is because regulators believe that placing similar requirements on smaller banks might prove an undue burden, as they may lack the large internal risk teams needed to respond to the tests. However, regulators have begun discussing an even more onerous form of stress testing called reverse stress tests. Under reverse stress tests, banks are required to identify future scenarios that could lead to their failure. Critics of these types of tests say they could serve as a blueprint for actual failures. Essentially, the hypothetical failure scenarios revealed in such tests could persuade investors and depositors to pull their money from the bank. However, reverse stress tests are easier for larger banks to manage since they already have risk teams engaged in this activity.

Some banks are revisiting their past statements on uninsured deposits after bank failures earlier in 2023 brought the problem of uninsured deposits to the fore. Bank of America, Huntington National Bank, BancFirst and First Interstate Bank have revisited previous disclosures and increased their estimates of uninsured deposits by billions of dollars. These restatements could reduce the amount that banks owe the Federal Deposit Insurance Corp. in a special assessment aimed at replenishing the deposit insurance fund. However, they may also highlight banks’ exposure to uninsured depositors.

Deposits fell 2.5% across the banking industry in the first quarter, building on outflows of about 2% in 2022. Lower deposits put pressure on banks, reducing the number of loans they can make. Falling deposits and more challenging operating conditions in general have reduced bank valuations by 30% this year. StoneCastle Partners Chairman and CEO Joshua Siegel, appearing as a guest on the “Street Talk” podcast from S&P Global Market Intelligence, sees opportunities for investors in the banking sector.

"I don't think that this is going to be any kind of a repeat of '08,” Siegel said. “I think this is the normal credit cycle that banks are meant to absorb. Earnings will probably be punished for the next six, 12, 18 months. And then it goes back to the cycle." 

Today is Friday, July 7, 2023, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

European Corporate Recoveries 2003-2022: Recoveries Stable Despite Few Defaults

The long-term average recovery on first-lien corporate debt in Europe remained broadly stable between 2003 and 2022, at 72.8%. The average recovery for 2022 instruments was slightly lower, driven by a couple of company-specific/fraud-driven defaults that had very low recoveries. The media, entertainment and leisure sector had most defaults, followed by the retail sector in the past two years. However, the media, entertainment and leisure sector had strong recoveries due to the debts' priority status in the structure.

—Read the report from S&P Global Ratings

Access more insights on the global economy >

Capital Markets

Corporate India Is On A Stronger Credit Footing

Indian rated corporates are as well placed as any in the region. This is due to strong underlying growth and accommodative balance sheets. S&P Global Ratings estimates aggregate EBITDA in fiscal 2024 will be about 50% higher than five years back for rated companies. Yet aggregate debt is hardly changed. A supportive factor is India's economic growth, which is the highest in the region, at 6.0% for 2023 and 6.9% in 2024, by our forecasts. A growing economy can paper over some cracks, such as the impact of China's reopening, which could create price competition for steel and chemicals producers. Despite tough offshore funding conditions, companies have easily tapped onshore financing.

—Read the report from S&P Global Ratings

Access more insights on capital markets >

Global Trade

Russia, Middle East Turn Equal Contributors To India's Crude Basket As Flows Shift

Indian refiners may expand inflows of West African and US crude if the recent production cuts by OPEC+ squeezes supplies, although inflows from Russia are expected to dominate the import basket for the rest of the year, analysts and trade sources told S&P Global Commodity Insights. While the recent cuts have raised concerns on the supply-demand imbalance, Indian refiners are not unduly worried as the move has failed to lift prices, an indication that demand revival is not as strong as expected earlier due to global economic growth and inflation concerns, they added.

—Read the article from S&P Global Commodity Insights

Access more insights on global trade >

Sustainability

Companies Face 'Massive Growth' In Litigation Over Climate Claims

Climate litigation arguments are becoming more widespread and complex, presenting added legal jeopardy for companies with carbon neutrality claims, a new report suggested. More than 2,340 climate lawsuits have been filed since the mid-1980s, according to the report from the London School of Economics' Grantham Research Institute on Climate Change and the Environment. Nearly three-quarters of the suits were filed in the US, where the US Supreme Court recently rejected an industry appeal to move climate cases from state to federal courts. At least 20 state and local lawsuits primarily against oil and gas companies are now likely to go to trial, the report said.

—Read the article from S&P Global Market Intelligence

Access more insights on sustainability >

Energy & Commodities

Listen: The Dire Consequences Of Falling Rhine Water Levels On Refined Oil Products

Europe is bracing for challenges this summer as its main waterway experiences lower-than-usual rainfall. The Rhine is drying up well ahead of historical patterns, and the short-term forecast is for water levels to fall below critical levels for barge navigation as early as mid-July. In this Platts Oil Markets podcast from S&P Global Commodity Insights, John Morley is joined by oil news reporter Robert Perkins, as well as Natasha Tan and Vinicius Maffei, middle-distillates and light-ends price reporters respectively. Together they look at the immediate impact and potential disruption to European oil product markets should the Rhine suffer a severe dry spell.

—Listen and subscribe to Platts Oil Markets, a podcast from S&P Global Commodity Insights

Access more insights on energy and commodities >

Technology & Media

Commercial Vehicle Forecast: MDHD Truck Market Coasts Through ’24, Then Accelerates As New Emissions Standards Loom

Post-pandemic market corrections will flatten North American demand and growth of Class 5-8 commercial vehicles and buses in the near term. Electrification will drive accelerating growth as next tier of regulations arrives in 2027. The US economy appears to have skirted the short recession in 2023, thanks to stoic consumer spending in durable and nominal goods, coupled with the resurgence in services, travel and restaurants — which have buoyed freight and truck activity though still being constrained by supply chain issues after the Covid-19 pandemic. A slowing-down is expected to be visible by the fourth quarter, turning into a soft-growth 2024.

—Read the article from S&P Global Mobility

Access more insights on technology and media >