Chart of the Moment: Nonbanks Step Up to Window Left by Banks

Since the 2023 regional bank crisis began one year ago, the stock performance of select nonbank financials stands in marked contrast to the performance of U.S. regional banks as measured by the SPDR S&P Regional Banking ETF and small caps more broadly as measured by the iShares Russell 2000 ETF. Market prices typically contain a mix of signal and noise, but the extreme divergence of this performance over the one-year time period is, we believe, mostly signal. Over the last year, bank managements have become more focused on liquidity and capital than earnings growth, dividends, and stock buybacks. As a result, we believe nonbank financials should benefit from reduced competition from banks. Included in the table below are some of the largest nonbank financial companies, including nonbank consumer lenders, a small business lender, a subprime auto lender, and a mortgage company.¹ We would expect the top of the customer funnel for these nonbank lenders to improve as banks back away from borrowers they previously would have financed. This shift will take time, but the evidence is starting to accumulate. Banks also have been retreating from certain parts of the mortgage business for regulatory reasons.

We see two implications for corporate credit fundamentals within financials. Nonbank financial bonds are benefitting from these shifting dynamics. And, for bank bondholders, a focus on liquidity and capital is constructive.

¹ Large nonbank financial companies by category based on Brandywine Global calculations using publicly available current economic data.

The SPDR S&P Regional Banking ETF, which seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® Regional Banks Select Industry Index, serves as a proxy for the U.S. regional bank segment.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities.