The banking sector continues to underperform the S&P500. And that is important to note because in the not so distant past, it was very difficult to see a sustained stock rally without banks actively participating of it. But within the banking sector, there are also big differences between big banks (money center, regional) and small banks (community). Their balance sheet composition is different and that accounts for a big part of the difference. For large banks, the biggest exposure on the asset side is Treasuries and Agency bonds, which are liquid, and so far have the best quality of any yielding asset class banks can buy. Small banks however, are heavily exposed (30%) to Commercial Reak Estate loans, and account for 70% of all the CRE loans in the country. These are illiquid and right now low quality, delinquent assets. Lending is therefore impaired for small banks and only big banks have the ability to grow their loan book, which prefer to underwrite big loans to big corporations rather than thousands of small loans to consumers, particularly at a time where credit card defaults are at their peak.
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Chart source: Apollo
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