Tuesday, June 16, 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 • Chuck Honeywell |
| 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 |
| 06/09/20 | 0.14 | 0.19 | 0.19 | 0.19 | 0.20 | 0.25 | 0.40 | 0.65 | 0.84 | 1.37 | 1.50 |
| 06/10/20 | 0.13 | 0.17 | 0.19 | 0.18 | 0.17 | 0.22 | 0.33 | 0.56 | 0.75 | 1.31 | 1.53 |
| 06/11/20 | 0.14 | 0.17 | 0.18 | 0.19 | 0.19 | 0.22 | 0.32 | 0.51 | 0.66 | 1.19 | 1.41 |
| 06/12/20 | 0.14 | 0.16 | 0.18 | 0.18 | 0.19 | 0.22 | 0.33 | 0.54 | 0.71 | 1.24 | 1.45 |
| 06/15/20 | 0.15 | 0.18 | 0.19 | 0.17 | 0.19 | 0.22 | 0.33 | 0.54 | 0.71 | 1.24 | 1.45 |
Source: U.S. Department of the Treasury, as of 06/15/2020
Water, Water, Everywhere…
A sailor in Samuel Taylor Coleridge’s famous poem, “The Rime of the Ancient Mariner” bemoans the fact that he is dying of thirst in the middle of the ocean;
“Water, water, everywhere,
And all the boards did shrink;
Water, water, everywhere,
Nor any drop to drink.”
And all the boards did shrink;
Water, water, everywhere,
Nor any drop to drink.”
Such is the case with liquidity in these most unusual times. We would rather not have it, we can’t make a “decent” return on it, and yet, it is the cheapest it has ever been in our lifetimes. There was a time in the not too distant past when we would have given our left leg for funding as cheaply as we have today. The question becomes, is there a way for us to take advantage of today’s low rates without causing significant disruptions in the balance sheet? Or how long would we anticipate it will be before we once again are begging for today’s pricing?
If you have the capacity (in both ratios and funding) there are opportunities to positively impact the earnings of the bank for years into the future. The reality is that when loan demand surges there is a race to increase retail and wholesale deposits in an effort to fund all of the new demand. What if we could anticipate that? What could we do in the interim to, at the very least, breakeven until this demand returns? Some clients have been able to maintain loan volumes due to the surge in Payroll Protection Program (PPP) loans. While most of us expect this to be short-lived (as well as the deposits that came with it), we are too often paralyzed by today’s facts, at the expense of tomorrow’s opportunities.
We dug into our AMG Database to see if there was a discernable correlation between liquidity and loan demand. I think intuitively, we understand there is, but I was surprised to see how steady loan demand has been (in the aggregate) for the last 2 years, hovering at around 72%. Using Fed Funds Sold / Assets as a surrogate for liquidity, it has typically averaged around 3% since 2015, but recently surged to more than 6% (the graph below is a 3 month moving average, so this average is just below 6%). One takeaway might be that this particular dataset needs around 3% in overnight money to fund their max loan demand. If deposits begin to decline as those PPP funds are utilized, we may find ourselves in a position of “fighting” for retail deposits once again. Also, it appears that FFS has been increasing for the last 2 years, is this an indication banks were feeling uneasy about the loan demand they had, or was it more anticipation of even further loan growth?
If you have the capacity (in both ratios and funding) there are opportunities to positively impact the earnings of the bank for years into the future. The reality is that when loan demand surges there is a race to increase retail and wholesale deposits in an effort to fund all of the new demand. What if we could anticipate that? What could we do in the interim to, at the very least, breakeven until this demand returns? Some clients have been able to maintain loan volumes due to the surge in Payroll Protection Program (PPP) loans. While most of us expect this to be short-lived (as well as the deposits that came with it), we are too often paralyzed by today’s facts, at the expense of tomorrow’s opportunities.
We dug into our AMG Database to see if there was a discernable correlation between liquidity and loan demand. I think intuitively, we understand there is, but I was surprised to see how steady loan demand has been (in the aggregate) for the last 2 years, hovering at around 72%. Using Fed Funds Sold / Assets as a surrogate for liquidity, it has typically averaged around 3% since 2015, but recently surged to more than 6% (the graph below is a 3 month moving average, so this average is just below 6%). One takeaway might be that this particular dataset needs around 3% in overnight money to fund their max loan demand. If deposits begin to decline as those PPP funds are utilized, we may find ourselves in a position of “fighting” for retail deposits once again. Also, it appears that FFS has been increasing for the last 2 years, is this an indication banks were feeling uneasy about the loan demand they had, or was it more anticipation of even further loan growth?
We will dig into this further in tomorrow’s PMR.
Please feel free to contact us if you have any questions or comments on this analysis, and as always, thank you for your continued confidence in CCB
Please feel free to contact us if you have any questions or comments on this analysis, and as always, thank you for your continued confidence in CCB
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.
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