2022 has been a tough year for banks even as central banks embraced their most hawkish tone in years. The closely watched SPDR Bank ETF (KBE) crashed by more than 20%, underperforming most global indices like the FTSE 100 and S&P 500. In this article, I will explain why Houlihan Lokey (NYSE: HLI) is the best bank stock to buy if everything implodes in 2023.
Houlihan Lokey vs KBE chart by TradingView
Recession bets rising
Last week’s interest rate decisions by the Federal Reserve, European Central Bank, and Bank of England sent shivers in the financial market and increased recession bets. They all hiked rates by 0.50% and pointed to further rate hikes in 2023.
These rate hikes increasing bets of a global recession in 2023. Besides, the American yield curve has already inverted to the lowest level in decades. Historically, the yield curve has been the best predictor of recessions.
It is still unclear whether such a recession will happen. What is clear is that the number of bankruptcies will likely increase in 2023. In a recent note, analysts at Allianz noted that bankruptcies will rise in key countries, especially those in Europe. As interest rates rise, more junk-rated companies will implode.
Houlihan Lokey could be a beneficiary of these corporate implosions. For starters, Houlihan Lokey is a small investment bank that most people have never heard about. But most corporate executives know it well.
Leading restructuring advisor
It is a bank that provides corporate finance solutions, financial restructuring, and financial valuation solutions. Its restructuring business helps to guide companies going through changes, including bankruptcies.
Studies show that it sits at the top spot for global restructuring. The other companies in the industry are Rothschild, Moelis, and PJT Partners. Houlihan Lokey is so successful that it was the main restructuring advisor in 12 of the 15 biggest bankruptcies since 2000. They include Enron, Conseco, General Motors, Washington Mutual, and WorldCom.
Most recently, Houlihan Lokey was called upon to help Evergrande restructure its obligations. Evergrande has over $200 billion in liabilities, as I wrote here.
Restructuring banks like Houlihan Lokey work for companies that are often in their deathbed. Yet, this is a highly lucrative business since they usually stand first in line when it comes to payments. Consider the statement from its CEO:
“And market conditions for financial restructuring continue to improve and we continue to see elevated levels of restructuring work in fiscal 2024 as a result of new business activity over the last couple of quarters.”
Houlian Lokey is not without risks. The most important one is that its other businesses like mergers and acquisitions (M&A) are expected to struggle.
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