The Fin has another article about the banks, one of many, in which they contrast the outlook across brokers and fund managers.

The essential questions are: 1) do net interest margins (NIMs) expand given rising rates, and 2) do rising bad and doubtful debts (BDDs) eat all the profit?

To be overweight, you’ve got to think 1) happens and that 2) doesn’t (or at least doesn’t entirely). There is competition, too, as we think of fintech lending. I don’t think we need to worry too much about those; they will cease to exist in a credit event.

But even if you think competition will keep a lid on NIMs and rising BDDs will prevent NPAT growth, you would have every other sector struggling without any offset in that environment.

There isn’t a positive relative argument to make for consumer discretionary if the bear story above plays out. It’s the same for any other sector with lots of duration risk and leverage risk. It is just a larger claim on revenues, with no attached benefits.

Now, it looks like a solid argument that we map out above. But it is by no means a slam dunk. And it is a trade with a somewhat limited lifespan. The bad case (rising BDDs) will come through with a lag in the same way rising unemployment does, as an indicator for anything, so we should see it coming.

Meanwhile, the NIMs should go first; if that happens, and the banks make some money, so we will have generated a decent outcome.

Note that we are only equal weight the banks. The overweights are to the insurance companies, and the above is about us trying to figure out if using up 20% of our capital just to hedge out the banks is a worthwhile trade.

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