Let's Talk Loans - Vol. 45
Another week, no further bank failures. Some news on Deutsche Bank this morning but perhaps we've dampened the fire? Answering my question from last week, is this Friday more or less scary than last Friday? Seems less scary, more settled. One can hope. Though we did witness coming out of last week the UBS / Credit Suisse bail out and the slow rolling discussions with First Republic. Thank you for returning to another edition of Let's Talk Loans. This newsletter is the musings and discussions that come off the back of the whole loan desk here at Raymond James. Talking about topics with community and regional depositories in terms of lending and front of mind issues that CEOs, CFOs, CCOs and heads of lending are dealing with. I hope you find the content timely and useful. If you do enjoy it, please like, share with a peer or subscribe.
A lot of talk over the last two weeks on the death of small to regional depositories. Will there be a massive walkout from these institutions as consumers move their money into the "too big to fail" banks? It seems, early trends, more rational minds have won the day. A thoughtful post earlier in the week (above) from the Financial Times as to the importance in main street depository lending. Significant players in CRE, residential and consumer lending compared to the Tier 1 shops. Specific to deposits, which has been a worry, in my several dozen phone calls with customers since the banking system cracked, most of our clients have reported slight net INFLOWS of deposits, not massive outflows. Looking around for data points that match my calls and the "feel" of the market, a recent quote from an S&P article.
A Hovde survey of nearly 100 bank management teams released on March 17 revealed that 74.2% of respondents said they have experienced "no material change" in total deposit balances over the previous week, while 18.3% said they experienced positive flows and only 7.5% said they experienced negative flows.
One of the emergency programs brought about by the collapse of SVB is the Bank Term Funding Program. A lot of conversations surrounding will clients be tainted by tapping this source much like TARP going back to the GFC. It looks as if the program is gaining steam as clients weigh their options to shore up liquidity. The March 22nd data does seem to show a shift from the discount window moving over to the BTFP - discount window dropped 42bn / BTFP grew 42bn. No question though, we are seeing record highs on using the Fed as the lender of last resort. Those not familiar with the discount window, the central bank provides short term liquidity (90 days) to depositories in exchange for collateral (treasuries / MBS) in times of crisis but that liquidity comes with a haircut. What's attractive to this BTFP program is there is no haircut. Liquidity is in focus right now.
According to Fed data through March 22, Bank Term Funding Program (BTFP) borrowing jumped to $53.67 billion, up from $11.94 billion the week prior. Discount window borrowing declined to $110.25 billion from a record high of $152.85 billion last week.
Putting the recent numbers in context as we compare to the 2008 crisis. I think this highlights the events of the last two weeks - not insignificant.
"In the tumultuous week ending March 15, banks borrowed $152.85 billion through the discount window, up from $4.58 billion the week before. The previous record was $111 billion, a mark reached during the 2008 financial crisis.
Comparing now to 2008 - to be clear today's issues are interest rate risk whereas the GFC was credit driven. We've had a handful of failures compared to the 532 bank failures from 2008 through 2019. However, the size of those two failures is approaching the GFC.
It feels as if everything goes back to the Fed these days. Our 8th hike since the start of this cycle bringing us to 4.75%-5.00%. Lots of hand wringing on the Fed raising rates in the face of a banking crisis. Will Powell be the Fed Chair responsible for hiking rates while banks implode? Or will Powell be the Fed Chair that successfully threaded the needle, tamed inflation, and saved the banks at the same time?
The market seems to have already made up their mind. The word that may have shifted sentiment is the removal of "ongoing".
I spoke to this a bit last week but at the start of the year the forward curve had us hiking another 2-3 times in 2023 (left image below). By February, after the increased inflationary bout, we felt the first concept of a cut. Fast forward to post rate hike, the market is now screaming for not 1 but 3 cuts by year end (right image below). What a difference a few weeks make. Was this the last hike before the pause? Or have we already broken the system and we will require immediate cuts?
Further updating the trend from last week. Treasuries have continued to rally (rates down, price up). Once SVB hit the news cycle, rates plummeted. Something broke. The 2 year peaked on March 8th at 5.07% and as of this typing is now 3.70%. Not a small move. The Fed hiked rates on Wednesday and the 2 year went DOWN, not up. The 10 year has followed a similar, though more muted path. March 5th was the recent peak for the 10 year at 4.05% and has since dropped to 3.35% as of this typing. 2s vs 10s were 100bps pre SVB, now they are 36bps. We wanted a pivot, seems as if we got it, just not exactly as we planned to receive it. The question will remain that if the Fed is late and continues to push for "higher for longer" how long will the market "fight the Fed"?
Mortgages have benefited from the recent news. Historically closely tied to the 10 year, the recent drop in rates has had a positive effect on mortgage rates. I suspect we have some room to see further declines in mortgage rates in the near term. Though this week wasn't all good news for mortgages.
"The national median existing-home price fell 0.2% in February from a year earlier to $363,000, the first year-over-year decline since February 2012, the National Association of Realtors said Tuesday"
We hosted a great call with Brian Ford, CFA and Eric Neglia from KBRA. A few snippets and thoughts from the call. If you'd like access to the replay, please contact your Raymond James sales rep. All credit to the below graphs go to KBRA.
Tackling solar first. We talked about this a bit coming out of SFIG West. This is corner of the lending world that is repricing. Gone are 0.99% coupons and 30 year terms. As rates rise and terms shorten, the value proposition comes into focus for the consumer. Is the loan payment still lower than the utility payment? Brian and Eric pointed to the better credit performance of the space due to higher FICO borrowers but the slower prepayment speeds recently witnessed due to the slow down in the mortgage market. These loans are often owned at discounts and slower prepayment speeds hurt yields and residual cash flow shortfalls.
Different conversation on the unsecured consumer side. Losses are higher and are expected to "normalize" (translation - go higher) over the course of 2023. One important distinction here for those who are buying the loan and not the bond. I'm generalizing but FICOs that find their way into ABS deals are generally lower than what is sold to depositories. Blended credits in the high 600s for ABS vs mid to low 700s for loan purchases. So while the discussion was around a weakening of performance, which I agree with, I do not think it will be as pronounced as to what is experienced in lower credits. We continue to encourage customers to stay up on credit here.
Most specifically, KBRA calls to attention higher losses in lower income bands and lower credit scores.
Finishing up, a great overall look at the consumer space - autos (prime and subprime), consumer unsecured and solar. Where are we right now in 2023 per their indexes? Prime auto and solar lending credit wise remains very sound. The lower tier of personal unsecured and non prime auto are certainly showing distress.
Speaking to that "normalization" I mentioned above, visualized below. As we see losses revert back to a 2017-2018 vintage, what might that look like? So far, non prime auto is outpacing consumer unsecured. Solar and prime auto remain strong but they will trend higher (relatively).
Hopefully this weekend stays quiet as to more banking troubles. I'm sure we will all be watching the headlines as we have a front row seat to this show.
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