Actually more and more people are “yield harvesting”. There are folks who keep some money in checking and savings account for their transactional needs. That’s where money market comes. It allows you to earn higher without locking the money.
Over the past 6 months over 500 billion has moved into MMFs.
That’s too bad, I hope your wife at least has medical power of attorney. Can mom pass the cognitive tests I watched them give the elderly , to prove competence ?
Do you know how small $500 BB is as a percentage of total bank deposits. Bank deposits are close to $20 trillion. $500 BB is less than 3%.
When covid hit bank deposits were only $15 Trillion.
Losing a few Trillion will just be normalizing.
You should look at that in context. The regional banks suffered the most. It is already reflecting in their loans!!! In 2 weeks ending March 29th $105 B contraction. That’s $105 B taken out of the economy, specifically from small-medium businesses.
"Gator
Losing a few Trillion will just be normalizing.
[/quote]”” what percent of the ,few trillion, do you suppose will leaving the most vulnerable Banks?
It didn’t leave the economy. It moved. probably half moved to other banks and the rest went into the capital markets. The reason many banks hold large amounts of securities is that they can’t find enough quality loans to originate. Most banks now are 50 - 75% loans to deposits. It is not clear to me significant less lending is in the cards. Runoff of securities is more likely. Especially since everyone is so sensitive to this issue. For example, Schwab’s securities portfolio which everyone is so upset about runs off at a rate of about $15 BB per quarter. BAC runoff is even higher. What is clear is that smaller banks that lose deposits will have to replace them with higher yielding liabilities. Net interest margins will decline, from what is recent record levels. But are likely to still be well above averages over the past 15 years. The bigger issue for regional banks may be the impact of commercial real estate loans. Not sure how to evaluate this? How much vacancy will there be, and how long will it take to absorb it. 10% vacancy is probably not an issue for banks. 30% may be a problem. Also, when these loans that were originally 80% LTV come up to be refinanced, the equity is likely to be much lower if not negative due to higher rates (cap rates). Will the owners walk away, banks roll over loans without new equity, ot owners put in new equity. Of course if the FED is correct and rates fall back down by 2025, maybe the problem goes away?
Let me explain why I think the experts may be wrong about the impact on lending of the movement of deposits.
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Banks can alway get new deposits or the equivalent from the FHLB at the marginal cost of money?
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When a bank makes a loan they have to assume a cost of funds. The cost of funds for the loan is not their overall cost of funds. Just like when you buy a stock, you have a required rate of return based on current interest rates. Banks do the same for loans. So a 5 year bullet loan has a cost of funds based on 5 year treasuries plus a margin. Even if the bank has 100% non interest bearing deposits. The loans has to be valuable on its own merits or they should not make the loan. So if deposit rate choices changes, this does not impact the NPV or IRR of the loan. The deposit book and the loan book of a bank are mutually exclusive business decisions. Now that doesn’t mean that higher deposit costs won’t impact the profit of the bank. But it should not impact the lending behavior of the bank. Not at all! Banks can replenish the lost low cost deposit with higher cost deposits like a non branch bank does every day. There is unlimited funds out there if you pay up.
Banks were plenty profitable 3 years ago when deposits were $5 Trillion lower? So why wouldn’t that be true if deposit decline a few trillion. Maybe BAC earns $2.50 to $3.00 per share instead of $3.35 over the next few years. Does that justify a 50% drop in the price? Yes it is likely earnings will decline, but not in half.
I would add that over the past few years BAC has also retired some stock with buybacks. So maybe EPS will suffer even less.
Regarding the FED or FHLB lines of credit. One caveat. Assuming you have portfolios of traditional bank lending products you are fine. Which SVB & to some extent SGB did not have. Almost all other banks do.
From March 9th to March 29th $1.35 Trillion deposits have left the banks and loans have gone down by $104.7 billion. Credit is contracting at alarming level. This level credit contraction is not seen from the time data is available and even in % terms this is equal to December 2009.
There are extremely severe numbers. The models are build using standard deviation, and when the data falls outside of 3rd standard deviation, the results are really scary. We may be getting there, I don’t know. I will be raising some cash and probably short the Index.
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Your data looks like it comes from Bloomberg article. I am looking at FED data. I don’t know their source but it appears incorrect or cherry picked:
From the weekly H.8 from the Federal Reserve System
Commercial Banks in the US
Deposits down 650 BB over last 12 months or 3%
CD>$100 K up $400 BB, other deposit down $1.1 Trillion or 6%
Borrowing down for the week of Mar 29 ($0.1 BB), after rising (0.5 BB over the previous 2 weeks) Balance sheets stabilizing.
Securities - sold/runoff 4 - 5% since year end 2022. Bond rally giving banks a chance to lighten up on securities. If HFS portfolio, likely capital improved as well as these are marked to market.
Loans and leases flat, not down, since YE 2022
I don’t see any category of loans that are down greater than 1% since YE 2022
Cash is up 0.3 BB since YE 2022. This may be what is causing the borrowing.
Total Assets are up .04 BB since YE 2022
Credit Cards are flat even though they are normally down after the seasonal payoffs since Christmas.
I am seeing just what I would be expected to see.
Some migration of deposits to higher yielding products. $1 Trillion so far.
Increase in cash held by banks (yielding about 5%) why not?
Increase in borrowings from FED/FHLB at about 5% rate as well
Runoff and selling of Securities by a little more than half of the decline in deposits.
Small increase in loan loss reserves.
Likely large decline in unrealized losses on securities. My guess is 15% or more of the $620 BB as of 12/31.
Data is updated weekly as of Mar 29.
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It is FED data. The same source. Why are you looking the data for the last 12 months? Compare the data after the SVB crisis or even better look at deposit trends from when the money market crossed 4%. I have first moved my money to CD and then I posted I will be moving to treasury at the beginning of Feb. Why I am saying this is, many folks have started to realize the yield you can get outside banks are higher and started moving. That is not going to change until banks can bring their deposit rates at par “market rate”.
I am looking at monthly data as well as weekly data. I can pick any data time period I want. I pointed out that the data is a current as you can get. Banks report data once a week to the FED. Incidentally banks only have to balance assets and liabilities once a week as well. Not every day. Other than Deposits and securities no category has changed noticeably. It is easy to pull up the H.8 report. look for yourself. Whether it is 1 week, 2 weeks, 1 month, 3 months or 12 months, loans are not declining noticeably in any category.
Just for the record. Unlike you, who are savvy and aware, most people don’t have a clue what rates are doing and have no interest. They will not move their money from the bank. When I worked at First Interstate Fed Funds ranged from 3 to 6%. Rates were never below 3%. Still we had tons of non-interest checking accounts. The average Joe in the street does not watch CNBC, Bloomberg or Fox business news. It is just not interesting to them. I have a friend who is a lawyer of some prominence. He had millions in low rate deposits. I called him a few months ago and asked him what he had done with them. Nothing! So I indicated that he should move them to a money market. I assume he did. But he I bright, highly compensated, successful and would have done nothing without my prompting. It took me years to realize that the customer I was setting prices for at First Intersstate was not me. The average Joe is just not interested in this topic.
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Yes bankers used to say “People will divorce before they change their bank account”, all that has changed/ changing. With mobile banking you can move your money with few clicks. Treasury direct, relatively painful process compared to other banks, is easy to setup. I set it, choose my yield, time and linked it with my WFC bank account, when the yield hit, I was able to buy the bills.
The process is so easy even my 22 yr old set it up. He is so overjoyed to find he can get so much higher yield he blasted an email to all his friends, co-workers.
Just not true. Just like Buffet, most of our wealth occurs later in life. 50 yrs + have all of the money, not 22 year olds. Young people need loans. Elderly need deposit options. That is what Schwab understands and robinhood does not. Neither my mother in law or father in law have a smart phone. They still have flip phones. They want a branch where they can walk in and see where their money is. Which are not easy to get I may add. Look at the numbers. 95%+ of all deposits have not budged and we have seen Rates over 3% since mid 2022.
Profit margins that depend on a majority of your customers remaining ignorant, may not be sustainable, going forward. We should have a much better feel by the june quarters end.
That doesn’t mean young folks don’t have money. He joined a startup right out of college and over a year he saved enough. Not just him, his friends, all the kids are big on saving & investing. He maxes his 401(K), Roth-IRA and invests only in Index (vanguard). Of course, he finished his college with no debt, and as graduation gift we got him a new corolla with 5 year maintenance paid!!!. Lot of folks believe in stereo type, but the data clearly shows, young kids are drinking far less than previous generation, saving more, lot less interested in drugs and SEX. Many of his friends are saving for masters and have accumulated anywhere between 15 ~ 50 K. For a young kid earning an extra $1000 to $2500 on interest is a big deal.
I am not claiming that customers are ignorant, just that they are focussed on higher priorities in their life. I don’t understand why someone pays $100 to go to a concert or a ball game. I don’t. I don’t own a porsche I own a Tesla and a Toyota. But people do. They get to make their own choice and life priorities. I am just pointing out from 40 years of experience in banking, deposit won’t move dramatically. Q1 margins will be fine. Jamie Dimon in an interview Friday indicated banks are likely to have solid Q1 earnings. While I can’t speak for credit trends, which may be fine given the low unemployment, I do believe Net interest income will be higher in 2023 than 2022, even with the current deposit under-toe. Q4 2022 margins were substantially above 2022 averages. Just Q4 margins remaining flat will substantially increase NIM in 2023. Add in that the FED is still raising rates and most banks are asset sensitive. The banks are much better off letting a small portion of the deposits runoff or reprice to another higher paying deposit than to reprice the whole portfolio. Keep in mind that a banks like BAC may have millions of $10 K or less accounts. But they add up in aggregate to big money.
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