Friday, August 14, 2020 |
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| MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris • Mark Tranckino • Robert Schuyler • Tom Toburen Josh Kiefer • Nicole Burczyk • Natalie Regan • Aaron Stoffer • David Farris |
| US Treasury Market | |||||||||||
| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 08/07/20 | 0.08 | 0.10 | 0.12 | 0.14 | 0.13 | 0.14 | 0.23 | 0.41 | 0.57 | 1.01 | 1.23 |
| 08/10/20 | 0.09 | 0.11 | 0.13 | 0.13 | 0.14 | 0.15 | 0.24 | 0.42 | 0.59 | 1.04 | 1.25 |
| 08/11/20 | 0.08 | 0.11 | 0.12 | 0.15 | 0.16 | 0.18 | 0.27 | 0.46 | 0.64 | 1.10 | 1.32 |
| 08/12/20 | 0.08 | 0.11 | 0.12 | 0.13 | 0.16 | 0.19 | 0.30 | 0.50 | 0.69 | 1.15 | 1.37 |
| 08/13/20 | 0.08 | 0.10 | 0.12 | 0.14 | 0.16 | 0.19 | 0.32 | 0.52 | 0.71 | 1.20 | 1.42 |
Source: U.S. Department of the Treasury, as of 08/13/2020
Do What You Can Do
At AMG, we produce and review ALM reports for banks of all shapes and sizes and a great many of these now have a Yield on Earning Assets (YEA) below 4.0%. In fact, the high end of YEA is around 4.25%. It is almost impossible to make a living on “Spread” banking these days if you cannot maintain a profitable spread, which is simply the difference between YEA and Cost of Funds (COF). Keep in mind COF does not technically include non-interest bearing DDA accounts which are always relevant when calculating “real” cost. However, let’s focus on all interest bearing liabilities, which comprise COF.
At the expense of sounding like a broken record, it is imperative to manage and lower the cost on interest bearing deposits. Yes, you have heard this before, but we still many banks with a 3.95% YEA and a COF at or above 1.0%. The spread in this example is 2.95%. In fact, due to circumstances beyond our control, most banks are living with a spread in the 3.30% range, even those who have slashed their COF.
As we have said before, the huge surge in deposits most banks have experienced is unrelated to rate. “Any port in a storm” is the most likely reason behind the current surge. The cost on non-maturing deposits, MMDA, SAVINGS and NOW can most likely be cut, depending where the current rate is, without losing, or alienating the deposit base. In fact, we have seen almost no instance in which these balances have decreased. We have seen some instances where CD customers have left after a rate cut. Who needs rate shoppers at this point? You can always get them back when you need them, and can afford to accommodate them.
Secondly, wholesale funding is cheap now and should be an important consideration (depending on the balance sheet) at this point, particularly when considering not only cost, but also the term or duration of the interest bearing liabilities. For instance, a three year brokered CD or FHLB may cost about 70 bps now, so you can use these tools to offset shorter, retail CDs if you want to extend the overall term. Again, there are many inexpensive alternatives at this point, so use them to develop an overall plan.
It not “breaking news” to repeat the obvious, but it is necessary to help maintain profitability at this point.
Thanks, please call us at 800.226.1923 if we can help.
At AMG, we produce and review ALM reports for banks of all shapes and sizes and a great many of these now have a Yield on Earning Assets (YEA) below 4.0%. In fact, the high end of YEA is around 4.25%. It is almost impossible to make a living on “Spread” banking these days if you cannot maintain a profitable spread, which is simply the difference between YEA and Cost of Funds (COF). Keep in mind COF does not technically include non-interest bearing DDA accounts which are always relevant when calculating “real” cost. However, let’s focus on all interest bearing liabilities, which comprise COF.
At the expense of sounding like a broken record, it is imperative to manage and lower the cost on interest bearing deposits. Yes, you have heard this before, but we still many banks with a 3.95% YEA and a COF at or above 1.0%. The spread in this example is 2.95%. In fact, due to circumstances beyond our control, most banks are living with a spread in the 3.30% range, even those who have slashed their COF.
As we have said before, the huge surge in deposits most banks have experienced is unrelated to rate. “Any port in a storm” is the most likely reason behind the current surge. The cost on non-maturing deposits, MMDA, SAVINGS and NOW can most likely be cut, depending where the current rate is, without losing, or alienating the deposit base. In fact, we have seen almost no instance in which these balances have decreased. We have seen some instances where CD customers have left after a rate cut. Who needs rate shoppers at this point? You can always get them back when you need them, and can afford to accommodate them.
Secondly, wholesale funding is cheap now and should be an important consideration (depending on the balance sheet) at this point, particularly when considering not only cost, but also the term or duration of the interest bearing liabilities. For instance, a three year brokered CD or FHLB may cost about 70 bps now, so you can use these tools to offset shorter, retail CDs if you want to extend the overall term. Again, there are many inexpensive alternatives at this point, so use them to develop an overall plan.
It not “breaking news” to repeat the obvious, but it is necessary to help maintain profitability at this point.
Thanks, please call us at 800.226.1923 if we can help.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
•Not FDIC Insured •No Bank Guarantee •May Lose Value