Here you’ll find: A micro Analiysis of the Banking System

1. A microeconomic analysis of the Banking System with focus in the 6 major players plus an aggregate view of the smaller ones.

2. How the market is already pricing in this situation.

3. The intersectoral relationship between two highly correlated sectors.

4. A brief intermarket look through the futures market.

5. A technical snapshot of the stocks identified as most exposed.

6. A statistical analysis comparing today’s situation to the past.

7. Our stance on the 6 losing trades over the last 2 months and the capital committed in the process.

Banking System and Credit

The banking system has different business units, and our goal is to understand their strategies to identify those most exposed.

Share of the Big Four

• In non-mortgage consumer credit (credit cards, personal/auto loans, leases, etc.), the four largest banks control 87.5% of the market—meaning 9 out of every 10 dollars are lent by them.

• In total consumer credit (mortgages + consumer loans), their share drops to about 37.9%, as many specialized mortgage lenders and regional banks also hold significant market presence.

Banking System: Identifying Exposed Banks

 From our review of consumer credit [here] and credit ex-consumer credit [here], we know that high—and worsening—delinquency and charge-off rates are not limited to consumer loans. They are present across all segments: industrial, commercial real estate, small business, and even both collateralized and non-collateralized mortgages in both types or banks. Big and small.

Banking System: Microeconomic Analysis of the Big Six and Small Banks as a Whole

Banking System: JP Morgan (short text below resumes table)

72.5% of JP Morgan’s business is generated from these types of credit. Their commercial strategy is clearly focused on them.

Source: JPMorgan Chase & Co. Form 10-K for the fiscal year ended December 31, 2024, and Q4 2024 Financial Supplement

Banking System: Bank of america

In Bank of America’s case, 69.8% of its business is exposed to these types of credit, including mortgages, unsecured loans, secured loans, and commercial and industrial credit.
Source: Bank of America Corporation Form 10-K for the fiscal year ended December 31, 2024, together with investor presentation: net income by line of business for full year 2024

Banking System: Wells Fargo

Wells Fargo has 63.7% of its business exposed to consumer loans plus mortgages, secured loans, and commercial & industrial lending.

Banking System: Morgan and Stanley

Here we see a different business model. The business unit focused on these types of credit has far less weight than in other banks, accounting for only 26% of its business.
Source: Morgan Stanley Form 10-K for the fiscal year ended December 31, 2024, and Q4 2024 earnings supplement.

Banking System: Citigroup

A completely different business model—nearly 80% of its revenue comes from other business units.

Banking System: Goldman Sachs

A business model focused on investment banking, trading, and asset management, with only 16% exposed to industrial, commercial, and CRE loans.
Source: The Goldman Sachs Group, Inc. Form 10-K for the fiscal year ended December 31, 2024, and Q4 2024 earnings supplement.

Banking System: Small Banks

65.6% of their business is exposed to these types of loans.
Source: Board of Governors of the Federal Reserve System – Statistical Release H.8, Dec 27, 2024.

Banking System: Does the Market Know This?

Of course it does.
The chart—although crowded—shows percentage growth in 2025. It reveals that Citigroup grew 37.01% and Goldman Sachs 22.3%. In other words, the least exposed were the ones that grew the most. The rest follow an order consistent with their exposure to this business, with the exception of JP Morgan, which, despite being highly exposed, still managed to grow 17.25%.

Inter-sectoral

The financial sector is up 9.24% in 2025, while real estate—an early-cycle sector—is up just 1.36%.
Why are banks rising if a wave of defaults is coming? Real estate is flat and in a critical technical spot. Market structure is bearish, yet financials remain bullish.

Intermarket Analysis 

Let’s turn to the futures markets for insight

Gold holding at these levels and trends—even with rates still rising—sends a message. A second comes from energy and industrial metals. The value of working with futures is that, in these cases, we’re looking a month ahead—seeing the market’s expectations for the near future.

Technical Analysis: Market Structure

• Higher highs and higher lows = Bull trend

• Lower lows and lower highs = Short Trend

• Mix if this signals doubt and trend changing.

The market structure is short on BAC, undefined on W.F, and bullish on JP.

Point and figure is another charting method. Its main feature is that it removes time from the equation and focuses solely on price. It is the go-to tool for identifying trends. (You can read about it here.) It is slower, requiring three closes of a certain magnitude to reverse a trend. Japanese candlesticks, on the other hand, plot prices in real time and are faster, but they also generate a greater number of false signals.

This type of chart, by focusing on closes without factoring in time, makes resistance and support levels stand out very clearly.

The same chart in Japanese candlesticks allows you to see the differences and, above all, observe the time factor. Each has its pros and cons.

Weekly oscillators in position.

All this is happening in a sleepy market with an economy full of imbalances everywhere.

Statistical analysis of the most exposed stocks

Returns

Nothing is happening. Everything is within normal parameters. The calm before the storm.

Volatility

Z-score is a normalization used to compare apples to oranges. For example, weekly volatility against the average annual weekly volatility. It tells you how many standard deviations away from the mean it is.

Levels above or below 2 are extreme readings. On the way to those thresholds, the magnitude of the move intensifies compared to the mean.

Risk-adjusted returns

The table reflects a comparison between two risk-return metrics:

• Sharpe Ratio (0.10–0.21): These values are extremely low. The excess return per unit of risk is very poor, since a Sharpe below 1 is already considered unattractive.

• Coefficient of Variation (CV 4.7–10): This measures relative volatility. Around 4–5 indicates more contained dispersion, while values near 9–10 reflect much higher instability.

Joint interpretation:
When the Sharpe Ratio is higher (~0.20–0.21), the CV is lower (~4.7–5.0), showing slightly more efficient returns with relatively lower volatility.
When the Sharpe falls to ~0.10–0.11, the CV rises to 9–10, pointing to highly inefficient assets: very low returns combined with very high risk.

In summary: The overall profile is weak, with very low returns for the level of risk taken. Only the cases where Sharpe is around 0.20 and CV close to 5 come closer to a more acceptable risk/return relationship.

Alright, that’s it for today. This is moving closer to a short setup, but given the mania dominating markets right now, we’ll wait for stronger confirmations—despite the current macro and micro picture.

We’ve been stopped out of our last 6 trades trying to anticipate this move, once again victims of the old adage: the market can stay irrational longer than you can stay solvent. In our case, we’re looking at a cumulative loss of 12% plus transaction costs.

It’s not serious—we’ve seen up to 12 repetitions in the past. The key is simply not to lose composure.

See you next time.

Martin