In spite of the Fed’s bullishness on the economy and bank health, Bank of America reports it is bracing for a $52B loss in pre-tax net income.
What does this say about the state of the markets, and what investors should be doing now?
The Banks Are Less Optimistic Than The Fed
Despite the big headlines proclaiming that US banks have passed recent stress tests with flying colors, it appears they will be hit with higher capital reserve requirements to brace for more credit defaults.
With more rate hikes planned, we could certainly see more layoffs, and consumers struggling to keep up with their debt.
While the real estate market continues to be super healthy and growing strong in many areas, we can anticipate that the above will also lead to limiting consumer lending. Which may create a spiral of its own.
More Back Troubles Could Be Coming
Bank of America says it has questions for the Fed and has begun talks with them. The Fed has posted much higher revenue projections than the bank itself is forecasting. BofA is predicting far deeper losses. This includes forecasting $57.4B in losses on leases and loans, as well as $14.1B in losses in goodwill impairment. For a new total loss of $52.3B for just a nine month period.
If Bank of America is struggling, then you can bet a lot of the smaller banks are too.
That would at least result in more bank bailouts by taxpayers, if not failures, and more consolidation.
Discounted Asset Trades
All of the above certainly suggests more discounted assets sales could be coming. Whether that is struggling banks trying to recapitalize by selling off assets fast, or it is their acquirers selling off assets they’ve bought for pennies on the dollar.
This can include both physical real estate, REOs, and mortgage and other debt.
There is limited access to these deals. So, align yourself and partner with those with access to deals.
Don’t rely on low rate, high LTV financing to support your business. Expect affordable housing and temp housing to soar in demand, with some strength in the luxury market as wealthy individuals put more of their money into physical property.
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