Seeking Alpha

Chris Whalen: The Biggest Opportunities For Investors Are In The Smaller Banks

Includes: BBT
by: Real Vision

Commercial lending is the most profitable lending category for banks, Chris Whalen, chairman of Whalen Global Advisors, told Real Vision.

But larger banks face fierce competition from insurance companies, pension funds, private equity, and more for this category.

Because of this competition for big assets, smaller banks have better pricing power, Whalen said.

Just how healthy are American banks? Chris Whalen, chairman of Whalen Global Advisors, has answered that question for Real Vision.

In a wide-ranging interview, Whalen said banks must focus on commercial lending, as that is their most profitable category. However, as banks get bigger, they start competing with the non-banks which want to steal that asset from them, such as insurance companies and pension funds.

“The smaller banks have better pricing power,” Whalen said. “If you look at say, BB&T, or any of the smaller banks below that level, they'll have 1% or 1.5% better yield on their loan book than a large bank. And it's simply because of competition for big assets.”

"I see the biggest opportunities in the smaller banks,” Whalen said. “And for investors who can tolerate the lack of liquidity, I think it's the only place you want to be in banks right now.”

Trouble Elsewhere

“The rest of the sector, [including] non-bank lenders, I think you want to careful,” Whalen said. “I think we're headed into a choppy phase in terms of both credit costs and funding.”

In terms of credit costs, he told Real Vision: “I don’t think we can escape an uptick in credit costs 18 months to two years out, especially for consumers. Because we’ve had junk come to the market that gets financed like it’s A-paper.”

The cost of funds is also going to go up, he added: “It's about $55 billion per quarter now. I think it's going to go up to $70 or $80 billion easily in this cycle.”

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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