As JPMorgan’s Dimon warns of cockroaches in credit, MRB says kitchen still clean

Investing.com--JPMorgan CEO Jamie Dimon’s recent warned cockroaches skittering through credit markets following bankruptcies of auto companies Tricolor Holdings and First Brands, stoking fears of a credit cycle turn, but analysts at MRB Partners say the kitchen’s still clean pointing to data showing sturdy credit metrics that will likely get helping hand from Fed rate cuts and a healthy economy.

"Credit quality metrics for most U.S. banks strengthened in the third quarter," MRB Partners said in a recent note, noting net charge-off rates -- a key indicator of loan portfolio risk -- and inflows into non-accrual loans actually declined at the majority of top lenders. The recent Third Bancorp loss was tied to the Tricolor fraud, but MRB sees the episode as isolated, with only minimal impact outside the specific bankruptcy. While few banks that saw upticks in non-performing loan rates in Q3, delinquency rates stayed low by historic standards, and several lenders even released loan-loss reserves due to "better-than-expected loan performance," it added.

There is plenty of evidence to suggest that the systemic risks flagged by recent scandals remain contained: debt-service burdens across households and businesses remain manageable, high-yield and investment-grade spreads are tight, banking sector credit default swaps are stable, and reserves for bad loans are well above pre-pandemic levels, according to MRB.

But the underlying health in credit markets doesn’t mask the pockets of risk that warrant further attention. MRB highlights the rapid growth in lending to non-depository financial institutions like private equity funds, REITs, and mortgage lenders. Loans to these entities now account for nearly 11% of all bank lending, yet MRB stresses the bulk of exposure is held by large, diversified banks, not regionals.

Despite isolated cockroaches, U.S. bank balance sheets are clean, and MRB remains overweight in large, diversified bank stocks on the expectation that loan performance will hold up as the economy recovers.

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