Banks: A Phoenix
from the Flames?
Ten years ago, it may have felt like the world was going to end. The financial system appeared broken and banks were to blame. Valuations in the sector fell dramatically and we saw government bailouts around the globe.
A decade on and things have changed. U.S. regulators have imposed higher capital requirements and financial services companies have been forced to raise their game.
As a result, the banking sector appears to be in much better shape and now looks very different indeed. For one thing, the U.S. is not facing the same national housing issue it was 10 years ago, so financial services have less leverage and more liquidity than they have had in decades.
In this sense, the global financial crisis (GFC) provided an opportunity to get things right. We believe the U.S. banking sector now looks more resilient than ever: it has not only survived previous downturns but has stood tall. In 2016, for instance, when the oil price collapsed, investors worried about energy-related defaults and collateral damage to financials that never came. There was a widespread (and unnecessary, in our view) preoccupation with 2008/09.
Looking forward, we believe the sector offers growing dividend yields, good capital return prospects and a measure of downside protection at what we believe are compelling valuations.
1 A Tangible Common Equity Ratio is used to try and estimate a how much a bank can sustainably lose before shareholder equity starts to become affected. The higher the TCER, the more robust banks’ balance sheets are deemed to be.
2 The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to ensure that institutions have well-defined and forward-looking capital planning processes that account for their unique risks and sufficient capital to continue operations through times of economic and financial stress. In the most recent test in June 2018 all 35 lenders assessed were found to be able to withstand a severe economic downturn.
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Charts are provided for illustrative purposes and are not indicative of the past or future performance of any Dreyfus product.
Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. There is no guarantee that dividend-paying companies will continue to pay, or increase, their dividend. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing. High yield bonds involve increased credit and liquidity risk than higher rated bonds and are considered speculative in terms of the issuer’s ability to pay interest and repay principal on a timely basis.
Past performance is not a guarantee of future results.
Mellon was formed on January 31, 2018, through the merger of The Boston Company and Standish into Mellon Capital. Effective January 2, 2019, the combined firm was renamed Mellon Investments Corporation.
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