As some of you may have read in an earlier post, I'm a founding director of one the local banks here. Below is a daily bank newsletter we receive commenting on yesterday's Fed action that you may find to be an interesting read.
I'm an optimist by nature but also a realist. We're likely already in a recession. It's going to get worse before it gets better. I've already commented on the huge credit card liabilities which are being written off with much more to come.
And closer to home for all of us, Repo Men are busier than they've been in 10 - 20 years. Auto loan delinquencies are at a 16 year high and I know one Repo Man, as an example, who has gone from 10 - 20 repos a month to as many as 60. Repos range from compacts to luxury with a healthy share of SUVs and large pickups.
Stock market and real estate markets are looking better all the time - we're in for some excellent buying opportunities.
---------
The Banc Investment Daily is a targeted newsletter specifically created for independent financial institutions.
Please call toll free (877) 777-0412, or visit
www.BancInvestment.com, for a subscription.
January 22, 2008
THINKING ABOUT THE EMERGENCY RATE CUT:
With the Dow poised for its worst open
since 2001, the Fed stepped in and
unexpectedly cut the target Fed Funds rate
75bp to 3.50%. The Fed’s last cut between
meetings was Jan. 2001. The last time
rates were cut 75bp was Oct. 1984.
Rumors of a 50bp and 100bp cut have
been circulating for the last two weeks, but
with the global equity markets in complete
disarray, the Fed decided it needed to take strong action. The
move partially worked as equity markets have stabilized down
300pts (vs the expected down 750pts). However, this raises the
question - what kind of leadership is our Fed showing? What
economic indicators changed to warrant an emergency move?
The timing appears amateurish at best and like panic at worst.
In the Fed’s defense, this isn’t your father’s credit market, so
all bets are off. The Fed tried to finesse the situation with market
talk and the TAF liquidity, but now it has decided to take a sledge
hammer to rates. Given significant losses in large bank earnings,
continued problems with liquidity, increased unemployment and
slower consumer spending; the move may have not only been
warranted, but may not have been aggressive enough when
viewed through the lens of history. Since the Fed is more
correlated to the market these days, it is important to understand
what the market’s further expectations are to global rates. First,
the market now expects the ECB to cut rates aggressively next
week. Second, the market is expecting a more aggressive
stimulus package from the White House. Third, the market is
betting that the Fed will cut rates as much as 50bp at next week’s
scheduled FOMC meeting.
The question is what can community banks do? First, banks
need to take more of a leadership position. In uncertain times,
business owners need someone to turn to for assistance.
Marketing messages that play up safety, stability and liquidity will
go far to gather deposits. Given the problems with large banks,
community bankers can gain ground. More economic
information, increased proactive planning and advice are all
needed. In addition to positioning lines of credit to customers
(with higher than historical fees), a fantastic campaign is to start
a program to help stable customers purchase their buildings in
light of falling real estate prices and lower interest rates.
Community banks also need to enact contingency capital
plans. Banks should consider deleveraging. The best way to do
this is to shrink the balance sheet by letting loans run off,
realigning credit mix to achieve greater diversification, reducing
expensive funding and increasing capital ratios. Doing so gives
banks added insurance should the US economy be heading into
a recession. Increasing reserves, taking write downs early and
keeping your regulators informed are all highly advised.
Remember that almost half of bank capital sources are no longer
available (trust preferreds, perpetual preferreds, etc.). As a result,
banks should revise their capital plans to tap holding company
loans or go back into the equity markets at reduced valuations. In
our models, 20%+ of banks are projected to have problems. If
true, banks that place themselves in better financial position will
be able to take advantage of upcoming market opportunities.
Finally, banks should reconsider their asset-liability plan.
Pricing for loans and deposits needs to be reanalyzed in light of
downsized targets. If banks increase marketing, more deposits
will flow in that are less interest rate sensitive. The absolute last
thing you want to do is attract money because of safety and then
train them to be rate sensitive.Banks should consider ways to
permanently capture this longer duration money. Please note that
this should not involve locking depositors in for longer maturities.
As our Liability Coach clients know, this has, and will remain, a
recipe for disaster. Liability duration will come naturally. Capture
new money in DDA and MMDA accounts rather than CDs.
Brokered CDs and FHLB rates should be taken advantage of to
replace more expensive retail money. Public funds need to be
reassessed. With rates moving 50bp to 75bp lower at a time,
bankers should increase monitoring of loan prepayments and
deposit changes for insight into their balance sheet. Smart
bankers have already run scenarios to understand how curve
shape changes effect their balance sheet. Today is a perfect
example of why running dynamic shifts in interest rates is
important to understanding how curve flatteners and steepeners
can effect loans and deposits.
Market uncertainty is upon us, volatility is everywhere and
bankers will have to do more work. However, with additional
uncertainty lies additional opportunity.
ECONOMY:
• No significant economic data is scheduled for release.
FIXED INCOME & RATES:
Friday: A holiday shortened-day reduced liquidity and caused
yields to fall 30bp (after the market felt the White House’s fiscal
stimulus package was not strong enough). Banks were on the
sidelines, but expressed concern that the drop in monoline
ratings will create a “permanent impairment” in their municipal
portfolios (resulting in an additional mark-to-market). Today: The
emergency rate cut and corresponding change in asset prices
are driving volatility. While financial equities are doing better,
markets remain sharply lower. Yields are down 16bp.
BANK NEWS:
• Bank Earnings Pounded: Large banks reported 4Q earnings
and the news was horrible. Wachovia said earnings fell 98%,
as it took a $1.7B write down in certain portfolios and set aside
$1.5B to cover bad loans. KeyCorp said earnings tanked 83%,
as it set aside $363mm in loan losses, a 684% increase over
the same period in 2006. Bank of America reported profit fell
95%, hurt by $7B of losses tied to write downs and rising credit
woes. Finally, Region’s profit sank 80%, as residential
developers soured amid a weakening housing market (loans to
homebuilders make up about 8% of the bank's portfolio).
MTD Treasury Yields Libor Rates Prime Swap Expected FF
3M 2.35 -49 1M 3.77 2Y 5.52 1/30 3.00
6M 2.39 -45 2M 3.76 3Y 5.72 3/18 3.00
2Y 2.05 -30 3M 3.72 4Y 5.96 4/30 2.75
3Y 2.30 -25 4M 3.66 5Y 6.18 6/25 2.50
5Y 2.65 -21 5M 3.57 6Y 6.40 8/05 2.00
10Y 3.53 -10 6M 3.49 7Y 6.59 9/16 2.00
30Y 4.24 -04 1Y 3.08 10Y 7.01 10/29 2.00
Mutual Fund Port Deposit Prime Treas. Repo 30Y Mortg.
4.68 4.25 7.25 3.80 5.21