Goldman Sachs Group still believes that American companies are positioned to withstand tougher lending conditions caused by the latest bank crisis.
The investment bank said that U.S.-based firms are less reliant on banks for capital, compared with their peers overseas, reported Bloomberg.
A tightening of loan conditions could have a smaller impact for the banking industry, Goldman strategists, led by Lotfi Karoui, wrote in an April 20 report.
The collapse of two U.S. regional banks sent shockwaves through financial markets and is still threatening to curb lending and public fundraising.Bank Sector Still Shaken by March Crisis
The consecutive bank failures in March led to downward pressure on credit ratings and a massive devaluation in the global financial sector, leading to an emergency takeover of Credit Suisse by UBS.“Now that the dust has settled on the risk of a full-blown financial crisis, the debate has shifted to the ability of the economy and markets to digest the aftershock of the March bank failures,” said the strategists.
“Owing to their greater financial flexibility, large and highly rated firms can adapt to tighter bank-lending standards.”
The Goldman team reiterated its predictions from February, before bond spreads widened, causing the banking crisis.
U.S. investment-grade premiums are expected to tighten to 117 basis points by the end of the second quarter from about 133 basis points, according to the strategists.
At the same time, junk bond spreads were predicted to fall to 400 basis points.
Goldman Does Not Expect Severe Recession
However, Goldman Sachs CEO David Solomon warned in February that tighter monetary policy could hurt economic growth and increase unemployment.He said that the Fed would still have to hike rates above 5.0 percent to curb high inflation, but that its hawkish strategy would not lead to a severe economic downturn in the end.
Solomon, meanwhile, is still concerned about the disruption caused by the March bank crisis on lending.“It’s important to appreciate the size of the disruption,” Solomon said during Goldman’s first-quarter earnings call on April 18.
“Some of the market moves during the period were staggering, particularly in interest rates.”
Solomon noted that two-year Treasury yields recorded their biggest one-day move in over 35 years on March 13, for the first time since the financial crisis of 2008–09.
“The recent events in the banking sector are lowering growth expectations, and there is a higher risk of a credit contraction given the environment is limiting banks’ appetite to extend credit,” Soloman said.
“We continue to be cautious about the economic outlook.”
Investors Remain Worried About the Industry’s Health
Solomon views align with his firm’s report that the shake-up in the industry in March will likely lead to weaker demand for raising capital in public markets and in additional mergers and acquisitions agreements.
He said that investors were very rattled last month, and that the bank failures further darkened their economic outlook.
“It was kind of an unusual few-week period with really, really outsized volatility,” Solomon explained.
“When you have that kind of volatility, it slows down or it has people push out things that they were thinking about bringing into the capital markets.”
Goldman’s rival, Citigroup, released a note on April 20 from its global asset allocation team which said American investment-grade and high-yield credit remains underweight.They also added that it was premature to rule out the potential for a credit crunch in the United States.
In contrast, the emerging market’s high-yield debt is overweight due to its tendency to outperform when the dollar is weak.
