NEW YORK–(BUSINESS WIRE)–#KBRA–KBRA Analytics releases this month’s edition of The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show.
This month’s newsletter, Bank Treasurers Haunted by Cycles Past, examines past interest rate cycles for insights into the current challenges faced by bank treasurers who are continuing to wrestle with a growing pile of excess cash as deposit growth exceeds loan growth. They are worried the Fed may be on the verge of a hiking cycle, so adding bonds at this point risks unrealized losses in their portfolio. They reported in their quarterly calls this month that the headwinds they have dealt with from premium amortization in their MBS portfolios are diminishing, but that spreads in the mortgage space remain tight to add a lot of bonds to the balance sheet. On the other hand, their near risk-free level of funding cost gives them latitude to buy bonds that would be accretive to earnings. They also believe that the ceiling on interest rates is low, on both the front and long end of the yield curve, and that deposits are turning out to be stickier than they previously assumed. Uncertain how to proceed, they remain instinctively cautious about getting overcommitted to bonds, especially given that they have a historically high concentration in bonds already, not counting the record excess reserves they hold at the Fed.
Shifting to the LIBOR transition, which goes to the end of this year, the newsletter discusses the push by bank regulators to get the banking industry to immediately cease or at least reduce their use of this index in favor of the Alternative Reference Rates Committee’s designated LIBOR replacement rate, the risk-free Secured Overnight Financing Rate (SOFR). Bank treasurers are lukewarm about using SOFR over a credit-sensitive index but are prepared to offer it, as well as the American Interbank Offered Rate (Ameribor) and the Bloomberg Short-Term Bank Yield (BSBY) index, upon borrower request. Assessing the relative advantages of a credit-sensitive index versus a risk-free rate in the current rate environment, the newsletter discusses how SOFR inexplicably fell to 3 basis points (bps) from 5 bps on October 18, even though the Fed’s reverse repo facility is still at 5 bps. The sudden change in the rate undermines market confidence in this index’s reliability on the eve of the transition.
The Bank Treasury Chart Deck examines how banks of all sizes increased their portfolio concentration in Agency CMBS at the expense of CMOs, as well as how these investments have repaid them with lower prepayment rates and higher yields over the last several years than if they had held CMOs. Tighter spreads have tempered bank appetite right now to increase their concentration in CMBS. Highlighting how supply of new issue CMBS will likely increase in the near term as multi-family construction lending exceeds single-family home loan originations, the Chart Deck highlights how rental costs in New York City have skyrocketed above pre-pandemic levels as demand has rebounded since last spring. Aside from the investment in MBS, the other large components of the portfolio are reviewed, including Treasurys, municipal bonds, and structured financial products. In search of yield, some banks have started adding AAA-rated CLOs, according to recent regulatory data.
This month’s edition of Bank Talk: The After-Show draws on bank data going back to 1863 to offer some perspective on the banking industry’s loan-to-deposit ratio (LDR) and its balance sheet concentration in bonds. Looking at the data, Ethan makes the point to Van (as well as a guest host) that the industry has further room to fall with respect to the LDR, and its current concentration in securities is only about average. The group then looks at the incremental cost in terms of dilution to the yield on interest-earning assets caused by a shift in balance sheet concentration from loans to bonds, and why the toll could be greater for smaller banks, rather than larger ones.
Click below to view the reports:
- The Bank Treasury Newsletter Chart Deck: October 2021
- Bank Talk: The After-Show: October 2021
- The Bank Treasury Newsletter: October 2021
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Contacts
Ethan M. Heisler, CFA
Strategy
+1 (516) 359-0975
ethan.heisler@kbra.com