Oct 6, 2023
Steve Eisman, the Wall Street veteran famously portrayed by Steve Carell in “The Big Short,” recently spoke about his distaste for banks.
“I happen to think the whole banking sector is uninvestable,” Eisman told CNBC in an interview.
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Surprisingly, his concerns about the banks aren’t rooted in credit issues but underlying challenges in the business model.
Banking faces immense pressure
In his interview, Eisman, who is now a senior portfolio manager at Neuberger Berman, expressed two major concerns about the banking sector: margins and regulations.
Rising interest rates, he believes, will put pressure on the profitability of banking. Bank earnings are based on the net interest margin — the difference between interest income made from the banks’ investments, and interest expenses paid out to depositors. Right now, banks are paying higher interest on short-term deposits but earning less on long-term loans such as mortgages, which are locked in for several decades. This could squeeze profitability, according to the Federal Bank of St. Louis.
“The deposits in the banking industry are still $2 trillion above trend,” Eisman said. “The idea that net interest margin is going to bottom any time soon I just think is wrong.”
He’s also worried about regulations. In July, the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency jointly unveiled plans to raise the amount of capital banks must hold in reserve to reduce risk within the industry.
“It’s going to hurt the earnings and return-on-equity for the banks,” Eisman said.
He believes banks face a tough environment where they’re compelled to hold more capital while margins are being squeezed.
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However, Eisman’s bearishness is limited to the banking sector. He’s much more optimistic about other sectors of the economy.
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Economic bright spots
Economic forecasts seem to have improved in recent months, with Goldman Sachs placing the risk of a recession at just 15% in a new estimate. Eisman describes the economic outlook as “not that scary,” during his interview with CNBC.
“At this point, since I don’t see a recession coming, I’d say there are more buying opportunities than shorting opportunities, except in the banking sector,” he said
One sector Eisman is particularly bullish on is infrastructure. He believes the Biden Administration's infrastructure spending plans will trickle into the sector and unleash capital expenditure in the years ahead.
“I expect 2024-2025 to be massive years for infrastructure-type companies,” he said.
In a previous interview on Bloomberg’s Odd Lots podcast, Eisman used the example of Quanta Services to highlight growth infrastructure. The company has seen rapid growth as capital pours into what he calls the “greenification” of the American electric grid. The stock is up around 300% over the past three years and is up around 23% year-to-date.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
