US Regional bank stocks - PNC Financial, TFS - Truist, USB- USB Bank, MTB - M&T Bank etc

[KJP]

Interesting market reaction to First Citizens winning what presumably was a competitive auction.  Apparently there is no winner's curse when it comes to the FDIC.

[Spekulatius]

It does not look like the deposit flight from small banks to large banks continued last week, after a steep dip, it looks like they stabilized.

 

[Spekulatius]

Here are the big banks deposits. After a little rebound lay week, they keep dropping. The narrative that deposits move from small banks to large banks may be false, Imo.

https://fred.stlouisfed.org/series/DPSLCBW027SBOG

 

[formthirteen]

4 minutes ago, Spekulatius said:

The narrative that deposits move from small banks to large banks may be false, Imo.

 

Deposits are also moving into money market funds:

https://www.bloomberg.com/news/articles/2023-03-31/why-us-bank-deposits-are-moving-to-money-market-funds#xj4y7vzkg

 

 

[Gregmal]

Yup, make everyone poorer by hiking interest rates!

[Cigarbutt]

^Submitted for:

-perspective (versus the deposit 'flight' or 'hemorrhage')

-if you like banks (large and small) (and there many reasons not to like them), the recent deposit 'shortage', in itself, is noise.

 

Deposits in the 'system' have been going down for some time mainly because of some Fed tightening with non-banks, commercial banks de-expanding their balance sheets through the sale of securities, including government debt. This trend down has been partly mitigated by the Treasury General Account (TGA) at the Fed going down. Lending by banks has played a role in deposit growth but this effect has been stunted by the other factors.

Overall deposits at banks continue to be way more elevated than the long term trend.

Also, what happens when cash goes from JPM or a small bank to a money market fund? There may be a short term blip in truly cash assets at MMFs but this cash does not stay there as MMFs need to convert this cash to an interest-bearing security of some kind. In the main, this cash, after MMFs use it to buy a security, goes back to JPM or a small bank. Yes, in a funny twist of financial plumbing and since banks are in no rush to accept more deposits (as they are flush with them), some of the cash accepted by MMFs as temporary deposits does go back to the Fed through the reverse repo window (essentially QT) and there's been some of that but banks remain bloated with deposits overall.

[Spekulatius]

47 minutes ago, formthirteen said:

 

Deposits are also moving into money market funds:

https://www.bloomberg.com/news/articles/2023-03-31/why-us-bank-deposits-are-moving-to-money-market-funds#xj4y7vzkg

 

 

Yes, that’s where deposits going, especially from larger and corporate accounts. I suspect that large banks deposits are more vulnerable to competition from treasuries and MM and that’s why they are losing more deposits than smaller banks. At least some smaller banks also have more competitive CD/MM account offerings than larger banks.

 

I don’t think that banks are flush with deposits any more. Sure the loan/deposit ratio is still low, but in my opinion, you have to add the ~4T or so in mostly underwater securities (which are sterilized on the banks balance sheet because banks would show losses in regulatory capital if they sell) to the loans to get the liquidity. There are more and more banks drawing down the FHLB credit lines already, which are an expensive way for banks to get liquidity.

Edited April 1, 2023 by Spekulatius

[changegonnacome]

1 hour ago, Spekulatius said:

Yes, that’s where deposits going, especially from larger and corporate accounts. I suspect that large banks deposits are more vulnerable to competition from treasuries and MM and that’s why they are losing more deposits than smaller banks. At least some smaller banks also have more competitive CD/MM account offerings than larger banks.

 

I don’t think that banks are flush with deposits any more. Sure the loan/deposit ratio is still low, but in my opinion, you have to add the ~4T or so in mostly underwater securities (which are sterilized on the banks balance sheet because banks would show losses in regulatory capital if they sell) to the loans to get the liquidity. There are more and more banks drawing down the FHLB credit lines already, which are an expensive way for banks to get liquidity.

 

Plus at an even more macro level the Fed is rolling off the balance sheet......bonds are rolling off, cash is being given to the Fed at par and they are incinerating the cash they receive........the contestable market for money that can go on deposit (cheaply/cost effectively) is shrinking....inside that equation folks are choosing to send money into MM funds further shrinking the contestable market...the marginal dollar for deposit has just got crazy expensive to 'win'.........FHLB & BTFP programs 'fix' short term liquidity issues but I see folks confuse them with old style QE.......to extent it's technically like QE......its an upside down version......that actually cripples bank profitability.......reduce their appetite to lend......and all things being equal when they do lend a dollar it increases the loan interest rate they demand and the credit quality/collateral quality they demand. 

[Cigarbutt]

^Concerning the idea that deposits have become scarce:

Concerning the recent wave (temporary, accrual-wise) of deposit outflows, how is this recent money flow different?

[Spekulatius]

@Cigarbutt I think in terms of MM flows, the current situation is similar to 2005-2007. At that time, we also had come Competition for deposits heating up because MM fund were yielding ~5% by the end of 2006. As I recall, we never saw a dramatic outflow in deposits into higher yielding vehicles. We will see if this time will be the same or different.

 

As for cash levels at banks, we can get all this data from FRED. It’s weekly updated so the recent cash increase from the bank Panik shows already.

https://fred.stlouisfed.org/series/CASDCBW027SBOGAs

As I mentioned before, banks used to sell securities when they wanted to lend and couldn’t increase deposits. This time, it’s not an option, they have to wait for them to mature, or take huge losses hitting regulatory capital.

 

Edited April 2, 2023 by Spekulatius

[changegonnacome]

Exactly to the extent extra incremental ‘cash’ is entering the banking system from FHLB & BTFP programs……this isn’t normal cash either…..it’s cash that’s being drawn down as a liquidity comfort blanket…..it’s a destroyer of NIM’s……cash under BTFP of course needs to be exchanged back for securities pledged in a years time…..put another way it isn’t cash that is turning into credit any time soon.

 

59 minutes ago, Spekulatius said:

https://fred.stlouisfed.org/series/CASDCBW027SBOGAs

Im sure somebody will do it……but this chart needs an overlay which is cash assets ex-FHLB & BTFP.

[wabuffo]

it’s cash that’s being drawn down as a liquidity comfort blanket…..it’s a destroyer of NIM’s

 

But is it a "destroyer of NIMs"?

 

Leaving aside the FHLB's, lending from the Fed delivers reserve balances as an asset to the bank (along with a loan from the discount window as a matching liability).   So its not really cash in the way you and I think about cash.

 

Take the BTFP as an example.   Current interest rate on a BTFP loan is 4.85% for a period of up to a one-year term.

https://www.frbdiscountwindow.org/

 

But the bank that is using the program receives reserves from the Fed that currently earn 4.83%.  It's not such a bad deal - 2bps net while getting par value (instead of the lower fair market value of the underlying collateral) while pledging some Treasury securities or Agency MBS.  And if rates move against the bank, they can cancel the loan at anytime without penalty.

 

Bill

[Cigarbutt]

2 hours ago, Spekulatius said:

...

As for cash levels at banks, we can get all this data from FRED. It’s weekly updated so the recent cash increase from the bank Panik shows already.

...

As I mentioned before, banks used to sell securities when they wanted to lend and couldn’t increase deposits. This time, it’s not an option, they have to wait for them to mature, or take huge losses hitting regulatory capital.

Banks, pre-GFC, existed in a tight reserves system and effectively kept cash levels very low because cash was a zero-earning asset. Since then, banks have existed in an ample reserves system. Since 2009, banks have been in no way restricted by cash levels in order to loan. It is ironic that there is a 'panic' now with cash levels overall that remain extremely ample or excessive. Sure, there are a few banks with idiosyncratic exposure (uninsured deposit, wild asset-liability mismatch with duration risk etc) but banks overall have absolutely no need to sell securities and can easily hold them to maturity. There is no fundamental need to throw a temper tantrum because of recent pseudo tightening.

Comparing the growth in assets for banks and MMFs is interesting.

There was so much money 'injected' into the system in 2020 that banks were drowning in cash and the excessive excess went to MMFs (and back to the Fed, reverse repo direction). That's why banks had no incentive to offer higher rates on deposits. The excess cash will move around but will, in essence, tend to end up in commercial banks.

 

[changegonnacome]

1 hour ago, wabuffo said:

So its not really cash in the way you and I think about cash.

 

True - and this was my kinda my point....I think about this banking kerfufle in terms of its economic impact not really interested in bank profitability per se...I think of cash in the banking system relative to its propensity at the margins to turn into credit which then turns into nominal spending/income in the real economy....or less interestingly its propensity to go into agency/sovereign securities to earn a spread which can influence the supply/demand in those markets, affecting pricing/rates, which in turn can affect the real economy (housing/gov deficits)......so totally agree here.....this is not 'true' cash.....and represents a kind of shell game where MTM losses on securities & liquidity issues at certain banks get to go away for a time........it's temporarily turning water into wine and a neat trick.......and where behind closed doors I'm sure the Fed & Treasury officials fantasize about conquering inflation and the latitude it would give them to cut rates & by extension shrink the MTM losses on the banks securities portfolios allowing them to lighten up on some of their duration mistakes.

 

1 hour ago, wabuffo said:

it’s cash that’s being drawn down as a liquidity comfort blanket…..it’s a destroyer of NIM’s

 

But is it a "destroyer of NIMs"?

 

I should have been clearer....I have an economists disease which is thinking too much at the margins & in opportunity cost......its a destroyer of NIM's relative to a theoretical incremental retail deposit flow (when they were available!) that is/was happy to accept 0.2%....and where that deposit had multiple optionaility for a bank to earn a reasonable spread....-2pbs relative to that scenario is order of magnitudes worse & a destroyer of NIM's

 

But is -2bps margin you outlined a kind of rose tinted scenario? Maybe just check my logic here. Now I know money is fungible so following a single $ inside a bank kind of ignores how a bank can manage/substitute its liabilities/assets across its book- but simplistically:

 

>2021 -Brad deposits $100 in RegionBankCo @ 0.0% interest........RegionBankCo buys $100 agency mortgage @ 3% coupon.....NIM....+3%...Nice

 

>2023 - Brad is gonna pull his $100 if he doesn't get 2.5% at RegionBankCo, RegionBankCo caves in pays him 2.5%.......NIM drops to - +0.5%....not bad, not great

 

> However - RegionBankCo is having liquidity issues as depositors leave......

 

> securities portfolio is underwater on MTM basis selling them for a loss is not an option as it would destroy tangible book.....new deposits are scarce, expensive & difficult to secure.....BTFP program is the only option......Brad's $100 deposit, that went into an agency mortgage at 3% gets sent to BTFP as collateral for a cash loan....now my understanding in a normal collateral lending scenario is the 'new' owner of security (BTFP) collects the 3% coupon (is this the case with BTFP?????)......you've collected $100 par value on the security, paying BTFP 4.85% for the privilege to get your hands on that $100 cash you need, which you get to turn around and put on deposit with the Fed at 4.83%.....so -0.2% NIM bad but not to bad.......but the 3% coupon payment now goes to BTFP.........the ONLY problem is............ your still paying Brad 2.5% for the $100 he gave you in 2021 that flowed into an agency mortgage.......in aggregate across the journey of that $100...... thats a -2.7% NIM....which is just terrible.

 

(Caveat of course is the above is a unique scenario and is clearly a bank under duress to solve for short term liquidity issues......given breathing space.....RegionBankCo starts marketing 3M 6M CD's paying 4.5% & wins incremental deposit flows........pulls back collateral from BTFP and gets to fight another day!)

 

 

Edited April 2, 2023 by changegonnacome

[mcliu]

On 4/1/2023 at 9:05 AM, formthirteen said:

 

Deposits are also moving into money market funds:

https://www.bloomberg.com/news/articles/2023-03-31/why-us-bank-deposits-are-moving-to-money-market-funds#xj4y7vzkg

 

 

Does anyone know how the mechanics of this works?

 

If you withdraw money from a bank account and place it into a MMF, doesn't the MMF keep it in their account at some bank? And if the MMF uses the money to buy a T-Bill, wouldn't they just withdraw cash from the MMF bank account and send it to the T-Bill Seller's bank account?

 

So how exactly does the overall amount of deposits move from banks to MMF?

Edited April 2, 2023 by mcliu

[Valuebo]

Good discussion here guys, thank you!

 

On a behavioral point, I'd just like to add it feels good to my contrarian brain that banks are generally looked at as black boxes that are basically uninvestable, regardless of of moat-like power for the big guys or the near-decade low valuations in absolute terms. Very confident in stating the relative valuation compared to the broad market hasn't been this low since '09. As if most companies have ever been anything else than black boxes for 99% of "investors". At some point the attraction wins from the smell and you take a basket approach where you rationalize that as a whole, the system of US banks is unlikely to blow up or permanentely destroy your capital. I feel we have approached that point in time, but maybe that is also because I don't see all that much amazing value elsewhere.

Edited April 2, 2023 by Valuebo

[KJP]

3 hours ago, changegonnacome said:

 

.now my understanding in a normal collateral lending scenario is the 'new' owner of security (BTFP) collects the 3% coupon (is this the case with BTFP?????)......

 

 

I do not think this is the case with respect to banks borrowing from the Fed.  See Section 7.8 to Operating Circular No. 10, which I believe applies to discount window borrowing and may apply to BTFP:  https://www.frbservices.org/binaries/content/assets/crsocms/resources/rules-regulations/071613-operating-circular-10.pdf

[Cigarbutt]

3 hours ago, changegonnacome said:

....now my understanding in a normal collateral lending scenario is the 'new' owner of security (BTFP) collects the 3% coupon (is this the case with BTFP?????)......  ....but the 3% coupon payment now goes to BTFP.........

Unless you show otherwise, the following applies for the Fed collateralized lending and income derived from pledged assets:

"Unless an Event of Default occurs or the {Fed} Bank expressly directs otherwise, any proceeds, dividend, interest, rent, proceeds of redemption, and/or any other payment received by the Borrower regarding any Collateral may be retained by the Borrower."

55 minutes ago, mcliu said:

...

So how exactly does the overall amount of deposits move from banks to MMF?

This was somewhat covered in the above posts but here's some additional perspective with a graph showing where the action has mostly happened in US MMFs:

So, in early 2020, excess excessive money went to MMFs (expanding their balance sheets) and the money then was swapped by MMFs for mostly Treasuries (resulting in a swapped money deposit to a private market participant in a commercial bank). Over time, banks started to resist (on top of keeping deposit rates very low) and the 'supply' of Treasuries dwindled so MMFs moved the money to the Fed through the reverse repo window (Fed sort of does the opposite of QE ie it loans a Treasury in exchange for money). And then with the system still awash with excess money and as a result of some duration mismatch and an uneasy market feeling, they set up a facility to exchange money with commercial banks for temporarily duration impaired Treasuries to make it easier during the tightening.

[changegonnacome]

 

5 hours ago, changegonnacome said:

the 'new' owner of security (BTFP) collects the 3% coupon (is this the case with BTFP?????)

 

1 hour ago, Cigarbutt said:

Unless you show otherwise, the following applies for the Fed collateralized lending and income derived from pledged assets:

"Unless an Event of Default occurs or the {Fed} Bank expressly directs otherwise, any proceeds, dividend, interest, rent, proceeds of redemption, and/or any other payment received by the Borrower regarding any Collateral may be retained by the Borrower."

 

That was my question - the wording above seems to pertain to broad Fed & certainly FHLB program collateral ......if the same terms are extended to the BTFP program (and given I find no reference to it being otherwise anywhere)....then its as was mentioned above a maybe 0.2% negative carry that provides a lot of liquidity support to banks.

[wabuffo]

then its as was mentioned above a maybe 0.2% negative carry that provides a lot of liquidity support to banks.

 

It can even turn into positive carry if the loan term is locked in for the year at the current BTFP rate but the Fed keeps raising the rate it pays on reserves.  Sweet!

 

Bill

[Spekulatius]

4 minutes ago, wabuffo said:

then its as was mentioned above a maybe 0.2% negative carry that provides a lot of liquidity support to banks.

 

It can even turn into positive carry if the loan term is locked in for the year at the current BTFP rate but the Fed keeps raising the rate it pays on reserves.  Sweet!

 

Bill

How much capital is required to support this carry trade? The return may not be that great. 

Banks do not have a liquidity risk in general, but I think there is a risk from the cost of deposits/ financing rising faster than the interest income (NIM squeeze).

[changegonnacome]

1 hour ago, Spekulatius said:

How much capital is required to support this carry trade? The return may not be that great. 

Banks do not have a liquidity risk in general, but I think there is a risk from the cost of deposits/ financing rising faster than the interest income (NIM squeeze).

 

True - risk weighting on US Gov debt securities is basically 0%....fair enough the carry works......but the agency mortgage stuff has a 20% RWA carry......still pretty capital light to support.....but enough for single digit bps...i doubt it

https://capitalmarkets.fanniemae.com/mortgage-backed-securities#:~:text=In addition%2C Fannie Mae MBS,of very high credit quality.

 

[Spekulatius]

Commentary from Dimon in his shareholder letter regarding the banking crisis is worth reading:

 

BANKING TURMOIL AND REGULATORY GOALS 

The recent failures of Silicon Valley Bank (SVB) in the United States and Credit Suisse in Europe, and the related stress in the banking system, underscore that simply satisfying regulatory requirements is not sufficient. Risks are abundant, and managing those risks requires constant and vigilant scrutiny as the world evolves. Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight. Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known – both to regulators and the marketplace. The unknown risk was that SVB’s over 35,000 corporate clients – and activity within them – were controlled by a small number of venture capital companies and moved their deposits in lockstep. It is unlikely that any recent change in regulatory requirements would have made a difference in what followed. Instead, the recent rapid rise of interest rates placed heightened focus on the potential for rapid deterioration of the fair value of HTM portfolios and, in this case, the lack of stickiness of certain uninsured deposits. Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements. Even worse, the stress testing based on the scenario devised by the Federal Reserve Board (the Fed) never incorporated interest rates at higher levels. This is not to absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them. 

As I write this letter, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come. But importantly, recent events are nothing like what occurred during the 2008 global financial crisis (which barely affected regional banks). In 2008, the trigger was a growing recognition that $1 trillion of consumer mortgages were about to go bad – and they were owned by various types of entities around the world. At that time, there was enormous leverage virtually everywhere in the financial system. Major investment banks, Fannie Mae and Freddie Mac, nearly all savings and loan institutions, off-balance sheet vehicles, AIG and banks around the world – all of them failed. This current banking crisis involves far fewer financial players and fewer issues that need to be resolved.

These failures were not good for banks of any size.

Any crisis that damages Americans’ trust in their banks damages all banks – a fact that was known even before this crisis. While it is true that this bank crisis “benefited” larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd. 

Let’s be very thoughtful in our reaction to recent events.

While this crisis will pass, lessons will be learned, which will result in some changes to the regulatory system. However, it is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended. Now is the time to deeply think through and coordinate complex regulations to accomplish the goals we want, eliminating costly inefficiencies and contradictory policies. Very often, rules are put in place in one part of the framework without appreciating their consequences in combination with other regulations. America has had, and continues to have, the best and most dynamic financial system in the world – from various types of investors to its banks, rule of law, investor protections, transparency, exchanges and other features. We do not want to throw the baby out with the bath water.

[scorpioncapital]

i keep 95% of my money in MM and  broker. Does anyone still use banks except for immediate bill payments?

[Xerxes]

Don’t cherry-pick unrealized M2M