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Credit Opinions, the Sublime and the Ridiculous

March 14, 2012

It has been a few weeks since we opined on matters Credit, whether sublime or ridiculous.  This blogger was just too busy doing fundamental credit analysis for portfolios he is responsible for (to earn his bread, butter and the occasional jam) as the financial year in India draws to a close on the 31st of March.

We will be back with a bang in early April with further thoughts on US big bank credit quality, post the certification by the Fed that all was well.  We opined earlier that the Fed, instead of conducting stress tests under hypothetical scenarios, should have forced greater disclosure from the banks and allowed the markets to conduct their own stress tests.  How banks came out with flying colors when US mortgages are reeling under a negative equity of $700 billion is an unfathomable mystery.  And that is just one of the numerous mysteries that make a bank credit analyst scratch his head.

A bank creditor relies on two things- a bank’s earnings as the first line of defense and a bank’s capital as a second line of defense.  There was absolutely no assessment of the stress that bank earnings are likely to witness over the medium term.  The more one thinks of it, the Fed’s stress tests were only marginally more credible than those of the ECB’s sometime back (the one which Irish banks passed with remarkable vigor before they had to be bailed out).  Anyway, more on that in the first week of April…


From → Credit Analysis

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