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

[Spekulatius]

A PNC presentation that is worthwhile to flip through as it also shows data from the overall banking sector. They did state that they believe bank reserves will get scarce toward the end of 2023.

https://d1io3yog0oux5.cloudfront.net/_76cee45995c2946cacec1a8e73ca7025/pnc/db/2222/21444/presentation/JPM_Investors_March2023_FINAL.pdf

 

PNC has a substantial security portfolio, but it is of relative short duration.- 28% will run off by YE 2024.

 

[yesman182]

8 hours ago, Spekulatius said:

A PNC presentation that is worthwhile to flip through as it also shows data from the overall banking sector. They did state that they believe bank reserves will get scarce toward the end of 2023.

https://d1io3yog0oux5.cloudfront.net/_76cee45995c2946cacec1a8e73ca7025/pnc/db/2222/21444/presentation/JPM_Investors_March2023_FINAL.pdf

 

PNC has a substantial security portfolio, but it is of relative short duration.- 28% will run off by YE 2024.

 

Thanks for sharing. I didn't realize how low the deposit to loan ratio for PNC was in the last 3 years. I would have thought it was closer to the mid 80's and maybe it will be if deposits run. 

[Spekulatius]

7 hours ago, yesman182 said:

Thanks for sharing. I didn't realize how low the deposit to loan ratio for PNC was in the last 3 years. I would have thought it was closer to the mid 80's and maybe it will be if deposits run. 

80% loan to deposit is a very normal number for a bank and would never really be a problem. They could either draw on a FHLB line back then (which was cheap during ZIRP) or sell their securities portfolio.

Now FHLB can still be done but costs ~4.5% and selling securities hits regulatory capital.

 

Now keep in mind that PNC (and other banks) have some interest rate hedges and PNC seems to have a decent amount of near term maturities in their security portfolio  as mentioned above. They also have a pretty diverse business mix.  I think their liability matching looks pretty good.

Edited April 5, 2023 by Spekulatius

[Cigarbutt]

^A ratio's significance is improved if inputs are looked at?

The graph does not show the relatively small change in recent trend

but the big drivers in the very significant decline of the ratio since 2008 have been QE to non-banks and commercial banks buying securities, both activities increasing deposits (balance sheet expansion).

-----

Just for fun, if there is an expectation of a potential run on PNC Bank, where would deposits go? Under mattresses?

[Spekulatius]

30 minutes ago, Cigarbutt said:

^A ratio's significance is improved if inputs are looked at?

The graph does not show the relatively small change in recent trend

but the big drivers in the very significant decline of the ratio since 2008 have been QE to non-banks and commercial banks buying securities, both activities increasing deposits (balance sheet expansion).

-----

Just for fun, if there is an expectation of a potential run on PNC Bank, where would deposits go? Under mattresses?

I don't think the likelihood of a deposit run on PNC is much different than for BAC. If there is a run on deposits on those institutions, we are at the toilet flush stage for the financial system and the economy.

 

The larger risk is a deposit bleed from low/no interest rate deposits into higher yield vehicles (from a customer perspective) that compresses the NIM for banks. this deposit bleed is already happening to the tune of $600B in aggregate (see my posts above with the FRED deposit charts) and is more pronounced for the large banks (which includes the likes of PNC) counter the current narrative.

 

 

[Cigarbutt]

2 hours ago, Spekulatius said:

...

The larger risk is a deposit bleed from low/no interest rate deposits into higher yield vehicles (from a customer perspective) that compresses the NIM for banks. this deposit bleed is already happening to the tune of $600B in aggregate (see my posts above with the FRED deposit charts) and is more pronounced for the large banks (which includes the likes of PNC) counter the current narrative.

As mentioned before, deposits have been on a down trend for a while (reasons for that unrelated to the recent 'liquidity' issue) and there has been a recent and slight change in this trend, especially for small banks (related to the recent 'liquidity' issue). There is no basis for the assertion that 600B have bled the banking system due to a recognition of MTM and AFS mark-to-market potential losses.

If you actually follow the recent money flows (recent blip down for smaller banks outside of recent trend), it looks like most of the money went through MMFs and back at the Fed through the reverse repo window. So when your local bank offers an in-house MMF higher-yielding security for your money, the higher yield is linked to IOER offered by the Fed.

So there are ways for money to leave the banking system including the Fed reverse repo window but, using Occam's razor tool, when, in normal circumstances outside of Fed operations, money is moved to an MMF, the MMF can only offer a yield on this money if this money is swapped for a higher yielding security such as a Treasury Bill. If the MMF buys a Treasury Bill, it will send the recently accepted money to the private market participant who held the Bill before. And where will this money go then...it will end up as a commercial bank deposit.

-----

Yes, banks have to 'manage' liquidity' and some banks may have to offer higher yields on deposits somehow but, overall, banks haven't been competing for deposits. Because they don't have to.

i woundn't mind if wabuffo would contribute here (to tear apart my perspective).

[mcliu]

@Cigarbutt thanks for the explanations.

Do you know if there's a limit to the RRP program?

[wabuffo]

i woundn't mind if wabuffo would contribute here (to tear apart my perspective).

 

In the old days (ie, pre-GFC), the monetary plumbing was simple.  The Fed ran with a small balance sheet (tiny amount of total reserves in the banking system).  The US Treasury also ran with a small balance in its TGA (so that its spending matched its security issuance).  Deposits grew in line with bank lending.  This makes sense because bank lending creates deposits.  The deposit may move from the lending bank to another bank, but the deposit just created stays in the aggregate banking system.  

 

But notice the two lines (deposits - red, bank loans - blue) start to separate after 2008.   This is also around the time that traditional monetary measures like M2 & velocity of money start to break down & emit weird results (confusing their adherents).  The reason is that the monetary regime changed.  The Fed began to expand its balance sheet with numerous rounds of QE and the US Treasury also started to run with large, but highly volatile TGA balances.

 

This is a long way around of saying that deposit balances now also reflect things like QE, QT and times when the US Treasury is flushing its TGA due to smacking up to its debt ceiling (like in 2021 and today).   I would add that the Fed has expanded its balance sheet to such an immense size that the banking sector can no longer handle the deposit creation of QE and so The Fed had to open a second liability funding source via overnight RRPs.  If the Fed hadn't done that in 2021, we would have gone negative rates in the US.

 

So what's happening today?  Well - the principal driver of deposit reduction in the banking sector in 2022 was QT.  QE/QT change the composition of private sector holdings from Treasury securities to reserves/deposits and vice versa.  But I think the recent double-whammy of the Fed's response to the SVB FUBAR is that it is once again flooding the zone with reserves at the same time that the US Treasury is drawing down its TGA.  Both of these will have a tendency to stop the deposit decline & start to increase it again, IMHO, for the short-term.   At least until both the banking crisis and the debt ceiling issues are solved.

 

Well that was a lot of rambling without probably answering your specific question...

 

Bill

Edited April 7, 2023 by wabuffo

[Spekulatius]

Went though $KEY's 10-K. There is some interesting disclosure on their interest rate swaps here. looks like they lost ~$2B on those  - in addition to losses on securities. They have a bunch of swaps where they receive fixed interest rates and pay variable ones. Ouch.

 

For reference, their regulatory equity Capital is about ~$15B.

Edited April 7, 2023 by Spekulatius

[wabuffo]

Well that was a lot of rambling without probably answering your specific question...

 

I forgot to add another important point.   The problem of uninsured deposits can't be solved (at least in aggregate) for the private sector.   There isn't enough FDIC insurance nor enough T-Bills.   Someone, somewhere, will always have to deal with where to put cash & cash equivalents while taking some counter-party risk (where the counter-party is neither the Fed nor the US Treasury).

 

The reason for this is just math:

1) The US banking sector has (round numbers) 17 trillion in deposits - of which $9 trillion are FDIC-insured.  That leaves $8 trillion of uninsured deposits.   Given that this is cash that someone has to hold - the alternative if one wants a zero-risk counterparty is T-Bills.

2) Total US Treasury bills outstanding is around $4 trillion.  The Fed holds about $1 trillion of them & isn't including them in its QT (the Fed prefers to let mature its longer-duration notes/bonds while continually rolling over its T-Bills).  That leaves around $3 trillion of T-bills circulating in private sector hands. 

 

Adding it up, I get $11 trillion of private sector cash & cash equivalents total (8 trillion of non-FDIC insured + $3 trillion of T-Bills) vs $3 trillion of T-Bills available.  Reverse repo solves a bit of that problem ($2 trillion) - but it is an issue that $6 trillion in cash can't find a "safe" place to park itself.

 

My math and analysis could be wrong here - so please feel free to critique my theories here.

 

Bill

[Mephistopheles]

@wabuffo - thanks again for your great explanation of how these things work. 

 

To your comment:

 

QE/QT change the composition of private sector holdings from Treasury securities to reserves/deposits and vice versa. 

 

When Treasury issues bonds, the money goes from deposits to the TGA. But then if the Treasury spends the money, it gets added back as a deposit, right? 

 

My question is - Treasury issuing new bonds takes away from the banking sector but that money returns right back when the Treasury spends, so what really changes?

[wabuffo]

My question is - Treasury issuing new bonds takes away from the banking sector but that money returns right back when the Treasury spends, so what really changes?

 

Basically nothing.  But lately the Tsy is spending w/o issuing Tsy securities (net of redemptions) - so it is currently adding to deposits (and reserves).

 

That'll change obviously when a new debt ceiling level gets set in July-Sept.   But in the meantime, half a trillion+ of spending is adding to deposits (and reserves).

 

Of course, QE just adds to deposits (reserves) by the Fed's buying.

 

Bill

[Spekulatius]

On 3/27/2023 at 2:14 PM, KJP said:

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.

In retrospect FCNCA was the stock to buy. I didn't - I know this bank a little but didn't feel i know enough especially with them digesting already one merger beforehand.

[CorpRaider]

I was dicking around with the B shares stink bidding when it was around $500. oof.   I'm telling myself people thought JPM stole Bear for a few months too, so it's alright.

Edited April 7, 2023 by CorpRaider

[Cigarbutt]

On 4/6/2023 at 4:01 PM, wabuffo said:

...

This unusual Fed-Treasury coordination has been tried before (World War 2) and things worked out (easy to say in retrospect). So this too shall pass. But i wonder about the potential unintended consequences of all the extra dollars that need to be held by someone at all times (effect on asset inflation and, more recently, on consumer inflation (MMT-like side effect)).

Thank you for the always interesting and helpful perspective.

 

On 4/6/2023 at 3:30 PM, mcliu said:

@Cigarbutt thanks for the explanations.

Do you know if there's a limit to the RRP program?

This is an investment board (apologies to John Hjorth for the following (likely?) waste of mental energy) but your 'macro' question is fascinating.

Easy answer (technical):

The Fed can widen the field of eligible participants and can (did double in 2021) the counterparty limit.

Tougher answer: there appears to be no limit (constraints)?

-----

This topic reminds me of a personal anecdote. This was my first clinical rotation as a resident in basic surgical training (cardiac surgery) and i was thrown into the action, on call at night, to take care of a bunch of relatively unstable inpatients, mostly post-operative cases. i'd go and assess these people semi-crashing on the ward (failing hearts) and then call my chief resident (one of the few people i'd let crack my chest open, given the right circumstances). Invariably, he advised to give a fluid bolus (long story short, increasing fluids (liquidity) will tend to increase output, at least temporarily). Invariably, a few hours later, the same patient would be crashing again from fluid overload (!) and then my chief would advise to give a diuretic (to get rid of the excess fluid) which almost always worked out in the short term. So he'd join me in the morning for a short round before going to the operating room. To the following question: Aren't we just trying to catch our tails here? came the following answer: Oh! the fundamentals, leave that to the cardiologists, they should be here soon. To the technically capable person that i potentially was, this answer always left me wondering about fundamentals?

-----
 

 

[Spekulatius]

New weekly deposit numbers are in from the FRED. Small bank deposits are stable, large bank deposits keep slowly dropping (~$40B over the last week). Cash sorting probably.

 

Edited April 9, 2023 by Spekulatius

[kab60]

2 hours ago, Spekulatius said:

New weekly deposit numbers are in from the FRED. Small bank deposits are stable, large bank deposits keep slowly dropping (~$40B over the last week). Cash sorting probably.

 

Yes, actually ticked up a bit for small banks.

[Spekulatius]

Bought some PNC today Post earnings. I quite liked the results and felt they were solid. I don’t quite get the market reaction.

 

It is however clear that regional bank stocks are around peak profitability and at least for PNC, further interest rate rises will lead to lower NIM (due to yield curve inversion getting steeper), but I think PNC handles this quite well. Then we also are going to look at higher reserves going forward

https://d1io3yog0oux5.cloudfront.net/_b0f9c850082c0d672a791c9596a58778/pnc/db/2250/21438/presentation/PNC_1Q23_ER_Presentation.pdf

 

What I liked:

1) Expense control and headline earnings

2) Higher tangible book (expected)

3) relatively strong no interest rate income

4) detailed information about CRE exposure, deposits, NIM sensitivity

 

What I didn’t like

1) little buybacks

2) lower NIM and earnings going forward

 

I think PNC is a solid buy here. It is not the cheapest regional bank stock out there, but I think it behoves investors well to not do dumpster diving here. I don’t consider myself a bank analyst, but can’t really find anything that I grossly disliked looking at their 10-k and press releases or CC transcript either.

[Spekulatius]

New depots number came out yesterday and indicate a stabilization both for small and large banks. I think it’s because the banks finally have started to raise their deposit interest rates. I think the Panik stage of this episode is over, at least for now, but banks will probably have more pressure on earnings (due to NIM compression) going forward.

In the next few weeks, I think FRC will find a new owner. I look look forward to seeing BAC numbers which I think are a tad better than PNC’s but not as good than JPM , mostly because of drag from. They’re large fixed income positions. For all banks, the losses on securities should be smaller because the long duration interest rates came down.

 

[Cigarbutt]

^The 'Panik stage' description needs to be put in context.

When the FDIC creates a bridge bank for a failed institution, deposits temporarily get withdrawn from the ordinary Fred numbers shown above.

For the 'small' banks, what happened to Signature Bank (89B in deposits) is responsible for much of the (apparent vertical) drop in deposits

FDIC: PR-21-2023 3/19/2023

For the 'large' banks, what happened to Silicon Valley Bank (175B in deposits) is not even associated with some kind of vertical drop as the withdrawal of deposits was easily mitigated in the normal course of human events.

FDIC: PR-16-2023 3/10/2023

This may change, but in this ample reserves regime, banks (as a group) don't need to compete with deposits as money is (still) coming out of their ears.

[mcliu]

https://www.cnbc.com/2023/04/17/apple-savings-account-announced-with-4point15percent-interest.html

Apple & GS adding some fuel to the flames

[mcliu]

http://www.holdcoam.com/wp-content/uploads/Presentation.pdf

 

The Unsafest and Unsoundest Of Them All –

U.S. Bancorp (Ticker: USB)

[CorpRaider]

Just a thought I had last night:  Wouldn't the most people get caught offsides (now that we have all plowed into government debt mmmfs and t-bills) if something happens with the debt ceiling and more direct exposure to treasury obligations is discounted as riskier than having an intermediary private bank and the FDIC layered on top of that treasury backstop (i.e., all these direct exposures take a larger, material quotational loss; or USA debt gets downgraded again and settles lower than Wells or JPM)?

Edited April 19, 2023 by CorpRaider

[Gregmal]

9 minutes ago, mcliu said:

http://www.holdcoam.com/wp-content/uploads/Presentation.pdf

 

The Unsafest and Unsoundest Of Them All –

U.S. Bancorp (Ticker: USB)

Man, every Tom, Dick and Harry now knows how to play the game. Just proclaim that the Fed won't have any credibility unless they do what we want them to. Dont mind our positioning LOL

 

"Until the Fed corrects its errors with respect to the country’s fifth largest bank, it cannot be credible as a banking regulator"

[Spekulatius]

2 hours ago, mcliu said:

http://www.holdcoam.com/wp-content/uploads/Presentation.pdf

 

The Unsafest and Unsoundest Of Them All –

U.S. Bancorp (Ticker: USB)

I briefly went through this presentation and can point to a handful misrepresentations.  For once, USB management stated that they are not buying back stock for the time being and rebuild the capital buffer above 9%. USB does very well in stress test results and has smallish CRE exposure. Now, if you criticize the stress test itself, you need to do this with for all banks.

 

Also, USB's management isn't stupid. They are aware of the $700B threshold for systemically important banks and it seems likely they had discussions with the Fed prior to buying MUFG US business. They are currently also below the asset size threshold and are running off some MUFG assets fort rationalization purposes alone.

 

Anyways, bought a few more shares today.

Edited April 19, 2023 by Spekulatius