Shares of Bank of America (NYSE:BAC) began the week sharply lower, as investors contemplated the possibility that Greece could soon default on its debts and thereby roil global financial markets. Is this concern warranted?
On the one hand, it's tempting to say no. This follows from the fact that Bank of America and other leading U.S. lenders have significantly curtailed their exposure to the southern European country.
At the end of the first quarter, Bank of America reported net exposure to Greece of $368 million. That's negligible for a bank with more than $2.1 trillion in assets on its balance sheet.
By contrast, Bank of America has net exposure of $46.3 billion to the United Kingdom, $17.6 billion to Canada, and $16.5 billion to Brazil.
Given this, it seems reasonable to conclude that the pressure on Bank of America's stock has less to do with direct exposure to Greece than it does to the indirect effects that would likely follow the country's exit from the European monetary union.
"A return of political stress or financial instability in these countries could disrupt financial markets and have a detrimental impact on global economic conditions and sovereign and non-sovereign debt in these countries," reads Bank of America's latest 10-Q.
We got glimpses of this disruption in January when the Swiss National Bank adjusted its currency peg vis-à-vis the euro. While the news paled in significance to the situation in Greece, it nevertheless pushed multiple foreign-exchange brokers into insolvency and caused large losses at banks with foreign-exchange trading operations.
According to multiple media sources at the time, Deutsche Bank and Citigroup suffered somewhere along the lines of $150 million in losses each, while Barclays racked up "tens of millions of dollars in losses."
On top of this, uncertainty about Greece's financial problems has already made its way into U.S. equity and fixed-income markets, both of which could impact Bank of America's bottom line. The yield on the benchmark 10-year Treasury note, for example, dropped by 4.8% on Monday as investors around the world poured money into what's generally presumed to be the world's safest asset.
Finally, it's worth keeping in mind that negative news like this could encourage the U.S. Federal Reserve to further delay an interest rate increase. As recently as two weeks ago, analysts and commentators seemed certain that the central bank would begin to raise short-term rates before the end of the year.
This would mean dramatically more revenue for banks. As my colleague Jay Jenkins noted earlier this month, JPMorgan Chase estimates that rising rates could boost annual profits by $4.5 billion over the next two years at the nation's biggest bank by assets. That would equate to a 36% increase relative to its earnings last year.
But this scenario is less likely if the situation in Europe isn't satisfactorily resolved. As the Fed noted in its most recent monetary policy statement, its decision to raise rates "will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
While this is bad news for banks in the short run, I can't help but wonder if it could present a buying opportunity for bank investors. U.S. banks aren't going anywhere anytime soon. If anything, in fact, given the seemingly inevitable course of interest rates over the coming years, their best days are still ahead. Consequently, if a Europe-induced correction in the stock market pushes valuations down, it may very well present an opportunity to get in on great bank stocks at much more reasonable prices.