The Banking Bulletin
The most important takeaways from Q1 2023 bank earnings in 9 mins...WAGMI
Summary: We are all going to make it. Banks and the economy are not falling apart. Many banks are profiting from the SVB and some have hit some temporary road bumps.
We thought the news might have been overdoing the end of the world bit. And despite First Republic, it is clear our banking system will survive. Some are even thriving.
THE CONCERNS
Summary: Danger signs for a bank are deposits running away, forced sales of government backed bonds to raise cash, and holding a large book of office-backed commercial loans in cities with low office occupancy. Good signs are the opposite. Steady deposits, enough cash to hold on to bonds investments, and an asset portfolio not concentrated in office-backed commercial loans.
When SVB collapsed I posted here and then last week discussed the hype and why not to believe it all.
Investors are focused on 3 things…
Outflows of deposits
Your deposits are the cash that the bank reinvests into loans and other assets. Loans are assets for the bank as they earn yield from these loans.
The flip side is your deposits are liabilities for banks. If depositors head for the exit with their cash, the bank is insolvent and shuts down.
Investors want to see that deposits are stable.
If they are not stable…👇🏽
Losses on “safe” government backed investments
SVB went down in part because the deposits (their liabilities) ran out too quickly. When these deposits stampeded out, they had to sell government bonds earlier than expected. Which wouldn’t mean anything in 10 years if you had a 10 year bond.
However, if you had to sell them now, then the bank has to eat a loss it wasn’t ready for. Why? As interest rates have increased, bonds with lower interests have dropped in value.
If the banks bought a 10 year treasury that yielded 2% last year, it is worth much less this year when interest rates are at 5%. If the bank can hold the treasury until maturity, the bond would be redeemed for its full value and then no loss.
Investors want to see well-funded banks to cover fluctuations in assets.
And other assets of concern include…
Commercial Loans
The media has been painting commercial loans with a broad brush. Reading the news make you think all loans in all cities are an issue this year and you get dramatic headlines like this:
The reality is something else. Some loans to some office buildings in some cities are of concern this year with work from home.
Investors are focused on office loans.
The narrative around commercial loans is shifting from unbridled fear to a more reasonable “it depends”.
THE RESULTS
Updated Daily Until Q1 23 Earnings Ends. Sources: Bank earnings, Bloomberg, Seeking Alpha, Barron’s.
Focusing on the 3 key issues above ☝️, I built a spreadsheet with important details for every bank. Find it here 📝.
Major Trends (not including First Republic)
As expected, large banks picked up assets
Some regional banks actually gained assets while some had large declines (4-5%). Some were unchanged. All regional banks have to pay more for deposits.
Most regionals thus far show balanced (low) exposure to commercial real estate.
Many of the regional banks were quick to point out that they have not and do not plan to access liquidity (cash) from the Fed sources (Bank Term Funding Program and Federal Reserve Discount Window). But it is available in an emergency.
Non-traditional banks (custody banks and Schwab) have plenty of assets. In some cases the assets increased. This also means they don’t need to sell bonds for a loss.
Non-traditional banks have customers shifting from cash deposits to money market funds. They think the trend is now slowing down. However, they are now paying more for cash deposits. When rates decrease this expense could drop quickly.
Banks have modestly increased loan loss/credit loss provisions. They only expect a small percentage of loans (all types of loans) to sour in the future. If a recession does hit us in the future, this could get adjusted massively to the downside.
At the same time, many banks have increased loans made quarter over quarter. This is the opposite of what would happen with a weak economy and weak banking system.
All institutions are prepared to manage interest rate risk until Fed rate cuts in Q4 2023/Q1 2024.
Large US Commercial Banks
🤔 ETC Take
All banks forecasted a mild increase in charge-offs/loss provisions as credit deteriorates. The message was that this was not nothing out the ordinary. The banks have plenty of assets to deal with this and fluctuations in treasury securities.
The large money center banks picked up meaningful deposits. They also have significantly increased the Net Interest Income as their securities (loans and new bond purchases) are yielding much more in the last year.
Another positive sign for large banks (this also benefited all banks) is the amount of unrealized losses have decreased as interest rates have come down over the last 6 weeks.
JP Morgan (JPM)
Deposits increased by 2% as JPM received many deposits that fled Silicon Valley. They have “very modest” exposure to Office CRE. JPM was the strongest of all of the large banks with impressive earnings.
Wells (WFC)
Wells seemed the most concerned by its real estate book as they have more office property loans in San Francisco, LA, and Seattle versus all of the other banks. However CRE office loans should be manageable as they are 4% of total loans.
Wells just had a slight dip in deposits.
Citi (C)
Deposits steady. In the scope of Citi’s massive business, CRE loans are only small percentage and not a big concern.
Bank of America (BAC)
Deposits decreased 1% after the bank picked up significant deposits with the fall of SVB. Bank of America received questions about the large $99 billion treasury losses sitting on their books. The CFO said that they have more than enough money to hold these asset to maturity.
Other Non-Traditional Banks
🤔 ETC Take
All these institutions have strong brands for future growth when the economy improves. Some were priced to crash. None are crashing.
State Street (STT)
State Street is an investment firm with significant banking operations. Earnings were slightly behind and there were outflows from its investment products. Nothing significant was reported.
Schwab (SCHW)
Schwab was receiving significant attention because of the large amount treasuries they hold. They had an increase of $132 billion in assets! In the short term clients moved money out of deposits and into money market funds but this shift will reverse in the future when rates come down. They have plenty of funding sources in the meantime. UBS said it best when they said earnings “were not as ugly as feared”.
Bank of New York Mellon (BK)
Deposits increased and earnings and revenues were ahead of estimates. Majority of the deposits and business is with large corporations and institutions which are generally more stable. No news is good news.
Regional Banks
🤔 ETC Take
The scare over CRE and fleeing deposits was overblown. So far these banks show an exposure to CRE office loans that is small and that they can handle. Deposits have increased at some regional banks as funds moved over from SVB. Allowance for credit losses (people not paying back in the future) is minimal at many of these banks.
PNC (PNC)
Although profits decreased slightly, they were in line with what analysts were expecting. Deposits actually increased! Only 2.7% of the total loan book is office CRE.
M&B (MTB)
M&B increased profit year over year with slight drop in deposits. CRE was not discussed in detail but management said the “office story will play itself out over multiple quarters.”
Western Alliance (WAL)
There was a massive jump in stock price since they gained $2.3 billion in deposits since 3/20. There was a sigh of relief on earnings as WAL is less reliant on deposits with increased access to liquidity. However, they will likely need to pay more for deposits going forward.
Only 6.2% of the CRE loans are in offices and of these only 15% are in concerning areas (San Fran/Bay Area, Seattle, NYC). Moody’s was still concerned and downgraded the company a few days after earnings.
Metropolitan Bank (MCB)
Year over year growth was strong but there was a 8% decline in revenue versus Q4 2022. Deposits dipped slightly in Q1 2023. Only 7% of the loans are office CRE and they have plenty of liquidity if needed.
Citizens Financial (CFG)
Citizens is the 13th largest bank in the country on Dec 31st. There was concern since deposits had fallen nearly 5%.
Year over year growth was strong but there was a 3% decline in revenue versus Q4 2022 and a 22% decline in net income versus Q4. Only 5% of total loans are office loans and 57% of those are higher quality Class A loans.
US Bancorp (USB)
US Bancorp was the 5th largest bank in the country on Dec 31st. After earnings, US Bancorp’s credit rating declined. That is troublesome because a decline can make it more expensive to do business.
Like Citizens, deposits are falling (down almost 4%). US Bancorp is exposed to declines in the mortgage market and earnings per share declined slightly since Q4.
Keycorp (KEY)
Deposits have barely budged and office commercial real estate is only 1% of the loan book. However, declines in the size of average deposits has been decreasing. Provisions for credit losses were particularly high versus other banks. They increased 67% from a one year ago.
Zions (ZION)
Zions did not have a good day at earnings. On the top line, they missed versus expected earnings.
Zions deposits fell 5.5% and only 55% of depositors are insured - these are the types of numbers that remind investors of SVB. Zions insisted that they could cover all deposits “without selling securities”. The ratio of CRE office to total loans was higher than many other regional banks. Credit loss provisions due to declining economic conditions increased versus last quarter and last year. Expenses have continued to grow every quarter for the last 5 quarters.
Loans were also slowing. However Zions said they have more prudent lending than their competitors “When problems arise, Zions generally experiences less severe loan losses due to strong collateral and underwriting practices”.
Webster (WBS)
Deposits grew with 77% of deposits insured by the FDIC. Deposit costs have increased. Forecasts for credit losses were minimal. Earnings and revenue declined over last quarter to the disappointment of investors. CRE loans are only 2.8% of total loans. The bank’s business is focused only in the Northeast region.
More securities moved over to the HTM bucket versus last quarter.
Huntington Bancshares (HBAN)
Deposits stayed steady with 69% of deposits insured by the FDIC (HBAN said they are #1 in insured deposits compared to publicly traded banks with >$50 billion in deposits). Deposit costs have increased. Forecasts for credit losses were minimal. Earnings and revenue declined over last quarter to the disappointment of investors. CRE loans are only 1.7% of total loans.
The value and composition of the securities portfolio has barely changed over last quarter.
Associated Bancorp (ASB)
Deposits grew with 76% of deposits insured by the FDIC which is inline with the last 6 quarters. Deposit costs have increased. Forecasts for credit losses were minimal. Earnings and revenue declined over last quarter to the disappointment of investors. CRE loans are only 4.25% of total loans.
The value and the composition of the securities portfolio has barely changed over last quarter. The bank’s business is located in the Midwest and Texas.
Online Banking
Ally Financial (ALLY)
Ally has been known to provide a high deposit rate and picked up 126,000 new accounts and increased the deposits by 0.56%. Insured deposits are 91% of the total.
Provisions for credit losses actually decreased by $44 million. Ally’s business is online consumer lending focused on mortgages, autos, and credit card. If consumer strength deteriorates, Ally’s lending portfolio will fall sooner than others.
If you have any questions, leave a comment. Thanks for reading Embrace the Chaos! Sharing perspective that makes sense.
- Vikas Kalra, CFA
I have accounts in 2 local banks and both of them are offering 4% or better interest on savings accounts without even going into CD's. Yesterday I learned that Apple and Amex are also offering interest on savings accounts. Likewise, I think lot of banks must be taking similar steps to attract customers to get more monies in their banks.