S&P downgrades five banks: 'A lot of opportunity' in banks, strategist says

S&P Global Ratings downgraded five regional banks: KeyCorp (KEY), UMB Financial (UMBF), Comerica (CMA), Valley National Bancorp (VLY), Associated Banc-Corp (ASB). Smead Capital Management CEO Cole Smead tells Yahoo Finance Live that "there's going to be a lot of opportunity" in the regional banking space. "The tumult... is not going to end overnight," Smead says, adding that ratings agencies' assessments tend to be more of a lagging indicator. "I think people should keep their eyes wide open and keep their ears attuned to what's going on in banking, because I think there's going to be some big winners and some big losers," Smead said.

Video Transcript

JULIE HYMAN: We're going to pick up on a related topic here because you mentioned lending for some of these projects. And multiple US banks were hit with the downgrade from S&P on Monday, following a similar round of ratings cuts from Moody's, S&P downgraded five banks total, saying that large deposit outflows and elevated interest rates pose a threat to the strength of the sector's overall health. The downgrades are the latest signal to warn of slipping confidence in the banking sector.

Cole, there are a couple of ways to go about this, right? I'm curious your take on buying the banks themselves and then we can kind of broaden it out and extrapolate to what all of this means for the broader economy. But let's start with the banks, specifically. Are you staying away from them right now or does all of this concern provide a buying opportunity?

COLE SMEAD: Yeah. We own Bank of America and JP Morgan. Those are the two big banks we know. We own other financials like American Express and Berkshire Hathaway and Credit Acceptance Corporation. But just looking at banking itself, we've done a lot of work in the regional banking space.

I think there's going to be a lot of opportunity. There was some earlier this spring. But I think it will continue because the tumult that we're talking about here, it's not going to end overnight. And by the way, using the credit rating agencies, don't worry about what they say because they always tell you what you need to kow after you need to know it. And I think that's what we're seeing.

They're now telling us, there's more risk than they thought there was. Great. That would have been really helpful like six to nine months ago. So I don't think that should really cause investors a lot of information. But I do believe we're going to find a lot of opportunity where there's going to be some folks that have books that are upside down and could have take unders.

And there's others that as people get fearful on banking or issues in the economy, that investors should find some great opportunities to place new capital. So I think people should keep their eyes wide open and keep their ears attuned to what's going on in banking because I think there's going to be some big winners and some big losers.

BRAD SMITH: Does that set up for more consolidation in the sector from your perspective?

COLE SMEAD: No question about it. To quote, I think the CEO of Western Alliance Bank has been quoted a lot. And we don't own the stock, but they're here local. He's asking, does the Federal Reserve want banks like them to be in business? Because really what the regulations are creating is an incentive structure that's going to cause us to have far fewer banks that are far bigger because they're just far easier to regulate, therefore.

I think that's the trend. I think we'll continue to see that. We'll probably lose a third of the banks we have in America over the next decade because of the regulation that's going to be put out and the regulation that could come as well.

JULIE HYMAN: Well, I think we have a lot more banks, right, than other countries do at this point. Anyway, so I don't know. I won't opine on what's too much or too few. I don't know the answer to that.

But I do want to get to the bigger sort of credit question, the implications for the economy. I just mentioned you probably heard in the Macy's statement talking about an uptick in credit card delinquencies. You take that, you take what's happening with the banks, you take, of course, rising rates and the tightening of credit overall, what's the impact on all of this going to be?

COLE SMEAD: Yeah. You got to remember we're coming off really low delinquencies prior to this. So you're going to see a natural uptick. Low delinquencies won't hold forever. You know, how we look at the pulse of that? We own Credit Acceptance Corporation. They're a subprime auto lender.

It's been really tough for someone like them to grow their business. Because if you go look at wage data, the two lowest quartiles of wages have killed it since the pandemic. In fact, the lowest has done the best.

You look at the household debt service ratio, it's historically depressed going back to 1981. So a lot of these things have been in a position where consumers have had excess cash, some tied to stimulus, some tied to the money they just didn't spend during the pandemic. And it's been a really good environment for delinquencies being really low at the same time. That can't hold forever, as excess cash has been coming down. You've seen purchases change.

So, you know, I wouldn't use a retailing credit card business as the ultimate view of what the economy is doing because there's times where they want consumers to have marginal credit because they make money on the clothes they buy because it's a captive audience, versus I would take a lot more credence than what we're seeing in American Express, which is you're seeing an uptick in delinquencies, but nothing that's large levels, nothing that's alarming for the consumer.

BRAD SMITH: It's not alarming that we currently have household debt and some of the credit that's come out from the New York Fed survey, at least recently. I mean, we're sitting at what? 17.06 trillion led by credit card balances right now.

COLE SMEAD: Yeah, but relative to the economy, that's not that big of a deal. So people always go look at the nominal number and they never say, well, what's that relative to the size of the economy, relative to the size of the consumer earnings power? And so people always quote those big nominal numbers. They sound fantastically amazing. Again, this is a relative world we live in.

I'll give you an example. One of the bigger negatives that we've heard on the consumer over the last six months is this idea that, oh, when the student debt lending starts to get repaid, the consumer is going to crater. In my lifetime as a millennial, that has been the most overplayed card I've ever heard.

No one was going to buy a house because of student debt. And that's what you'd read in "The Wall Street Journal" back in '13, '14, '17, '18. Those kind of things have not mattered.

I think, again, the risk has been that people have discounted and disbelieved that disbelief in the consumer. That has been really the strength, the continued confidence, the continued momentum. What they haven't had a lot of worry about is stock prices and bond prices. And that's where we're continue going to see a lot of pain because everyone thinks they're going to make their 6% to 10% return in stocks. And bonds aren't going to do that bad.

And I'm sorry, it's going to be terrible the next decade. It's going to suck. And because these short term rates will be gravity to asset prices. And the consumer is weathering that far better.

BRAD SMITH: I don't know. Some of us millennials have had a tough out here. Pandemic, we'd have to weather through. A lot of us were trying to get jobs out of college.

COLE SMEAD: I agree. I was there. I got out of college in '06. The first three years of my career was like, well, this sucks. But I would say that, A, no one want to buy a house in '10 and '11 when houses were cheap as they ever got. No millennial wanted to even try.

So again, why? Because their friends weren't getting married, so they didn't. So there were opportunities left and right for millennials. The question is, who took them? And to your point, I moved from Seattle, Washington to Phoenix, Arizona in 2020.

You know, I got this arbitrage land prices. We're going to see that stuff go on. That's already going on. That's some of the trends we were talking about earlier. I just say it because no one promised us a rose garden in this life. And we got to go out and grab it by the throat and take advantage of it.