I am not negatively stereotyping. I am just pointing out that time is your friend when building wealth. My son is saving a bunch as well. However I still have 30X his net worth. The majority of wealth, with many exceptions, lies in the older tier of our population. Always has.
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This is the shock the banking system is going through. SVB faced bank runs, but all banks are facing bank walks, i.e., the deposits are seeking higher yield. If Fed does one more hike at that point you are looking at money market offering 5% and it is only going to accelerate this trend.
Technology changes behavior and bankers are not getting it yet.
SVB failed because their assets were crap! That is why the FDIC is eating $20 BB. Not because of a deposit run. You donât lose $20 BB on top of equity on a base of $200 BB without owning crap assets because of deposit runoff. The deposit runoff just shined a light on the assets that were opaque and mis-valued. SVB was not a bank. It was a PE fund that used a bank structure to attract deposits. It deserved to fail. See any other real banks failing. That is why FRC was bailed out by other banks. They have traditional bank assets. The big banks know that their bailout is money good, because there is equity to buffer them. Even if FRC fails, losses will be manageable.
Again, watch the numbers. So far only 6% of deposits have moved and 1/3 of those stayed with the banks in jumbo CDâs. These are the facts. That is after 500 basis point rise in rates and 3 bank failures. I certainly can be wrong but I donât see a mass exodus of deposits. Iâm sure some individual banks have faired much worse, but not the top 10.
I expect with the rise in fixed income activity, trading profits, and improving NIM, banks will have higher pre-tax pre-provision profit in 2023 than 2022. Provisioning may rise as we normalize credit losses in the post covid environment.
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Do you guys read Barronâs ? From todays article on the space, ââ Analysts at Keefe, Bruyette & Woods are taking an average 8% haircut to earnings forecasts for 2023 and 11% for 2024, expecting to see narrowing net interest margins along with higher expenses and fewer buybacks as banks hold on to capital.ââ
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I didnât say earnings wonât be lower. I said pre-tax pre-provision. This is different. I think Keefe is wrong for the biggest banks. US Bank confirmed in early to mid March presentation that they were comfortable with Q1 and Full year earnings. Jamie Dimon indicated Q1 should be solid as recently as Friday.
I will add that I have doubled my bank position over the past month. I own only top 25 banks. I am thinking of adding more Monday.
Good morning, first of all, thanks to those who participated in this discussion. Hopefully, the most important takeaway is, try to get power of attorney and medical power of attorney , early, when loved ones are healthy and alert, even in their 20s. Stuff happens, and unfortunately itâs often, bad stuff, in dysfunctional families. Plus, as people get older, they can become even more difficult to reason with. Good luck to all, hopefully you can avoid heart breaking situations. Happy Easter.
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Thanks everyone for your insight. Happy Easter!
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FWIW. One item I have not discussed related to Business Checking accounts. When you look at a bank and they report non-interest checking accounts, it may be misleading when you look at checking accounts. On the consumer side non interest is non interest. But on the business side non interest checking accounts receive a fee credit based on the level of 90 day interest rates. So if I leave a million dollars at BAC for a month, I would like receive the 90 day treasury rate, less a small margin discount, as a fee credit to pay for my banking services. So as rates rise, I can either lower my balances, pay less hard dollar fees, or increase my services. At the aggregated bank level you might miss the movement across revenue lines if you only focus on one line at a time. BAC CEO highlights this in the Q4 earnings report call discussion. This may also explain why deposits have moved lower over the past 12 months. Rates based, but there is an offset on the income statement so the profit is retained.
I you listen to Moynihanâs call he points out that the decline in deposits to date is primarily on the Global Markets side or business accounts. So it is likely not a real decline due to consumer rate flight but just good old fashioned cash management skills that every company should have. Rates rise, compensating balances for analyzed checking accounts should decline. I think the media has totally missed this. Not surprised.
FYI. Looked at weekly H.8
Bank deposits up this week
Securities owned up? Surprise to me.
Loans up.
Borrowing from FED/FHLB declined. 2nd week in a row.
Deposit runoff from March 2022 still less than 5%. I think we are close to the lows on deposits. Even if it continues a little it is likely to never reach 10%.
JPM net interest income forecast raised.
WFC reiterated NII up 10% for the year, no change from previous forecast. WFC bought back $4 BB in shares. WOW. And capital ratio improved QOQ. Listened to WFC call. They see sequential decline in NII. Still forecasting 10% YOY increase. They indicated that forecast likely light and they should do better.
PNC sees small decline in Q2 NII from Q1, still up YOY.
Unrealized loss marks on securities portfolios likely 10% or more below peak. Again freeing up capital ratios.
Nothing earth shattering so far.
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Their assets were mostly US Treasuries, which is hardly âcrapâ. The problem was that they took long bonds with slightly higher payouts when interest rates were low, and got caught in a liquidity trap when depositors got spooked and wanted their cash out immediately. That forced them to liquidate some of that portfolio at a loss, which spooked more investors (when it became known) which resulted in a classic run on the bank.
Its PE investments were a tiny fraction of deposits. It held less than $10B in an asset base of over $210B. A great number of its cash was from VC and other investors true, but that was not âcash at riskâ, it was âcash over the FDIC guaranteeâ which is a different thing. When those with such large deposits realized their exposure they headed for the exits, all at the same time.
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SIVB securities had an unrealized loss of $17.6 BB as of YE 2022. $2.6 BB of which was for AFS securities so it was included in Equity mark. Equity was $16 BB. So, excluding the treasury securities if the other assets were valued at par, the FDIC would be whole upon disposition. But that is not the case. The FDIC projects an additional $20 BB in losses. None of those losses were related to deposits. They all fall on the quality of the assets.
Where are you getting your numbers?
10-K. It is all right there.
Just thought I would throw out a brief update.
Took a look at the most recent H.8 filing.
Non CD Deposits were 16.65 Trillion as of April 2022. Now 15.25 Trillion. The largest monthly declines were Oct 22 $0.4 Trillion and Mar 23 $0.4 Trillion. May 23 decline is less than $0.1 Trillion. Still peak to current level declines of less than 9%. Keep in mind that business transaction deposits fluctuate based on usage and rates.
CD deposits are up $0.5 Trillion over that time period.
Over the same 12 month period Loans and leases are up $1.0 Trillion. Mostly flat to up 1% since Dec 2022. April is the only declining month in 2023. Declined less than half of a percent.
I would add that BAC, JPM and WFC are still forecasting a rise in net interest income based on the slope of the fed funds forward curve.
.
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Gator, thanks for sharing your thoughts. Do you know the average interest rate return those deposits are currently earning vs say 6 months ago ?
Specifically, no. Generally yes.
Keep in mind, that as deposits reprice up, assets do the same. So, for a bank like BAC, they have very few CDâs.
So CDâs are about 11% of total deposits for all banks, much lower for BAC, up from about 8.5% over the past year. In general CD rates are based on treasuries (not fed funds) and rates for treasuries over the past 6 month are relatively flat. Up 0 to 25 basis point based on the maturity. Most CDâs prior to the past year were likely very short term so most if not all have repriced. My estimate is that 75% of all CDâs are priced pretty much the same as 6 months ago, if not slightly lower as you go out the yield curve. i was able to by 5% 5 year CDâs 6 months ago. Today the same CD only pays 4.50%. Of course any CDâs that move over from checking or savings accounts will have greater impact. But the data isnât showing much of that migration except for Oct & March. May was a trickle.
Of course non interest bearing accounts on the consumer side donât reprice. Business accounts are impacted directly by 90 day treasuries, but there is a fee offset. And of course the bank receives a somewhat fixed spread id they are investing those in 90 day treasuries, which they should.
Money market savings accounts may be the most impacted.
Keep in mind that a banks like BAC Has large fixed rate liabilites.
Capital 10%+
Debt issuance $250 BB+
Preferred fixed rate debt.
So while BAC may have $700 BB in fixed securities, they probably have $500 BB of fixed equity + debt.
I would add that I think I read that BAC hedged their HFS portfolio with swaps so more likley only about $500 BB of their securities are fixed.
Of course then on the other side.
All prime based loans are rising 100% with fed funds, no lag, which is moving the most on the yield curve. Prime is over 8% now. Then add a spread of at least 2.50% depending on the loans risk. Most business loans are Prime based. Some credit cards and maybe even some Home Equity.
All auto loans are repricing up. New mortgages as well.
The bottom line for me is that all of the money center banks are raising, not lowering their net interest income forecast.
The banks are mostly reporting record! earnings at this time. If you want to poke holes, and you always can worry when you own a bank, look at non consumer credit. Possibly CRE, but I have reviewed that as well. Much too my surprise, most of the those loans had 55% LTVâs when originated. That still leaves some risk, but the equity holder will have to walk away from a lot of equity for the banks to feel pain.
Let me know what you are concerned with mostly.
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Stress tests are out and all banks passed. In fact as a group of 23 even after absorbing $541 BB in losses overall Capital is still at a hefty 10%.
I keep going back and looking at the 5 banks I own. (BAC, WFC, USB, PNC, MTB).
All look cheap to me. BAC looks the safest.
BAC Highlights.
a) Rising NIM. Only banks with high CD and high rate money market product exposure are seeing NIM decline. BAC is not exposed.
b) Less than 60 BB in CDâs. Basically a rounding error. CDâs are the biggest category to reprice up.
c) $18.7 BB in Office CRE loans. Assume 100% loss, will only take 2 quarters earnings to recover. CRE is a complete non issue for BAC. Stress test demonstrates this.
d) Large securities portfolio. Approximately $600 BB in HTM. $200 BB HFS. The HFS portfolio is hedged for rising rate so no mark to market loss. HTM securities matched against $600 BB in capital and long term debt. Will eventually roll off with only loss being opportunity cost of what could of been higher rates. Assuming the $600 MM reprices from 2% to 6% in the future, NII increases by $24 BB annually. If rates stay at current levels this will happen.
e) One of the pleasant surprises for BAC in the stress test, their large securities exposure increases in value (as rates fall during the recession) as their reserving increases so that their overall capital level is basically unchanged. They are the only bank to show flat comprehensive earnings and capital ratios through the cycle.
f) BAC closed 500 branches to 3,800 since covid while the balance sheet (earning power) increased by over 20%.
g) In spite of the media negative characterization, BAC will likely report record income this year.
h) Still only 10% off 52 week low.
Will try and address WFC next.
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Thanks for the post Gator
Some other data points that I am looking at
- BAC has continued to increase dividends since 2014
- Current yield is at 3%
- Stock price is down from $47 to $28
- Leap to buy a call for $20 in Jan 2025 is available for ~$10. Todayâs price is $28.
You can see the trend in the quarterly filings.