Let's Talk Loans - Vol. 47
Welcome to another edition of Let's Talk Loans. Appreciate you reading and returning to the discussion about what's trading and trending in the whole loan market. Next Friday will be the 1 year anniversary of this newsletter. Time does fly. Nearly 4,000 subscribers later, I've been pleasantly surprised by your response to the content. If you have any suggestions, topics you want to see covered more frequently, or ways I can improve it - please shoot me a message. Also, if you have a peer you think might enjoy the newsletter, please share or like the content.
First, I want to address what is an increasingly shrill scream on deposits. Outflows continue. "Largest drop in a decade" per Bloomberg. This outflow in deposits is one of the main concerns clients have in the market today.
From our conversation with Nathan Stovall last week, outside funding sources are on the rise. Brokered CDs, FHLB advances, BTFP, they are ticking up as deposits run out the door. The below graph by Nathan, highlights the trend. The top graph, black line, is your loan to deposit ratio. The graph below that teaches us the lesson that SVB painful got dealt. The pink line factors in the liquidity negative (or positive) to the impact of HTM securities. That line brings to focus what I keep feeling in our calls, you're more cash strapped than what loan to deposit shows us.
Speaking of cash. Smaller institutions are running low on cash compared to their larger brethren. Those shops below 250bn are at a cash low dating all the way back to 2008. This is amplifying your concerns.
That's now leading to a pull back in loan volumes. There are those who will say that lenders are pulling back on credit. There are pockets of credit where that may be true. However, it feels more like FUNDING pressure which is causing depositories to pull back on lending. I would agree that parts of commercial lending is being impacted by credit. Office in particular.
"Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a a drop in loans by small banks."
"The pullback in total lending in the last half of March was broad and included fewer real estate loans, as well as commercial and industrial loans."
Consumer lending surrounding auto and mortgage is more about affordability.
Speaking to affordability, who ever thought you would have a 1k per month auto loan? New car values have risen such, coupled with higher rates, that over 16% of new car sales have a 1k payment or more. One has to think this is a risk factor growing in the auto portfolio.
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Moving over to jumbo mortgages. Bloomberg had a great post this week on the challenges that are the mortgage market, specific to jumbos. Showing my age a bit with this commentary but there was a time when jumbos were true portfolio loans and very illiquid. Jumbos often had coupons some 50bps higher than conforming balance loans due to that liquidity concern. Bloomberg's graph only goes back to 2011 which is roughly when Redwood and JPM kickstarted the private label securitization market back up. The idea coming out of the great financial crisis was that prime jumbo was going to be a great source for cross selling. If your FICO score survived 2008, you had wealth, you were going to make it and you were a prime candidate for wealth management, deposits, credit cards, private banking, etc. As such, the historical gap between conforming balance loans and jumbo loans tightened in and even inverted. Jumbos had coupons LOWER than conforming balance mortgages. Recently, during COVID, that spread differential widened to historic levels (to the good for jumbos) as American's put a real premium on space. Now, as rates have risen, affordability is firmly in the front view, balance sheets have hit concentration limits on duration and longer term products, mark to market concerns on deeply underwater coupons - all this has splashed cold water on the product.
Commercial real estate. Last week I wrote a lot about the CRE market, it's recent growth and the challenges CMBS are facing. Much has been written about distress in the Office market, for obvious reasons. Unrealized losses have been talked about in the bond market, the 30 year fixed rate resi mortgages but cap rates and valuations are still rolling through the CRE market. Pain is coming to even the most sacred of sectors in CRE. Just this week did we see a large rental / multifamily portfolio in Houston go under per the Wall Street Journal. We are only just getting to the tip of a very large iceberg here and it will be broad based in CRE. Stay on top of your annual reviews. Get your updated rent rolls and financials. I suspect this conversation is one of many coming soon.
It's bank earnings week. Despite all the gloom and doom that we've been reading these last two months, the numbers are coming in strong. JPM - 52% jump in revenue from the same quarter last year. Citi - 7% jump in profit and 12% growth in revenue from the same quarter last year. Wells - profit boost of 32% from a year ago. PNC - net income up 18% from the previous year. There appears to be a strong focus on deposits, but risk of credit doesn't seem to be the issue.
"Analysts are closely watching banks for signs of tightening lending that?could lead to a credit crunch, but Wells Fargo “hasn’t substantially changed our credit risk appetite” over the last quarter
Specific to credit:
The bank’s chief executive, Jamie Dimon, who?has taken a leading role?in bailing out smaller lenders, said the banking crisis was distinct, but that financial conditions were likely to tighten as lenders, including JPMorgan, become more conservative. “We are going to eventually have a recession, but that may be pushed off a bit,” he said.
Have a great weekend! M22-173670