This year's bank crises were certainly dramatic. But looking forward, PIMCO is confident that we are through the worst.
A major reason for this is that higher interest rates should be supportive for the banks' profitability. "Even though interest rates have been increased dramatically, many banks are not passing them along to depositors," says Alfred Murata, Portfolio Manager of the PIMCO GIS Income Fund.
"In theory a bank could be taking these deposits, investing in short-term government bonds at a 5% or even higher yield, and yet be passing on close to zero to depositors."
Profitability could offset losses
Putting aside the ethics of this from a depositor perspective, it adds up to a positive outlook for the banking sector. Yet at present, some investors aren't grasping the opportunity. They're being put off by the banks' mark-to-market calculations, which are currently showing a loss due to investments the banks made when rates were low, such as securities or loans.
Murata argues it is a mistake to focus on this calculation and not the banks' forward profitability. "I think that as time passes, the banks' profitability could offset these losses, which in any case have not actually been realised," he says. "And the lending facilities provided by the US Federal Reserve should hopefully tide the US banks over."
Of course, there is still a need to be vigilant and cautious. As a result, the firm is focusing on senior debt from the larger, systemically important banks, as these are the most likely to potentially benefit from government support if they were to run into trouble.
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