Financial Services Highlights: The Race is On
While bank spreads have improved since Tuesday, they are still at the very high end of their 52 week range.
Minyan Peter, who has become quite popular around the 'Ville with readers and professors alike through pieces like his Bank Earnings series, here writes in with some observations on financial services.
In Friday's Federal Reserve report – for the week ended September 12 – bank balance sheets grew by another $70 bln (in addition to the $270 bln of growth over the prior four weeks) while net equity in the bank system declined by $17 bln and deposits shrank by just about $10 bln. While this Friday's Fed report will give us the data for the week leading up to the Fed meeting, it is clear that the acceleration in bank balance sheet growth – particularly funded by non-deposit sources – was of serious concern to the Fed going into its meeting.
Since last Tuesday's Fed meeting we have seen a slew of long term debt issuance by financial services firms – Barclay's (BCS), JPMorgan (JPM), Lehman (LEH), Wells (WFC), Wachovia (WB) and the list goes on. As most of this has been holding company level debt, it was most likely used to bring down commercial paper levels and stretch out debt maturities. I would highlight, however, that while bank spreads have improved since Tuesday, they are still at the very high end of their 52 week range.
Finally, I saw a word today that caught my eye – "re-intermediation". And I expect that we will see this word quite frequently in the months ahead. Put simply, it is the opposite of "disintermediation" and suggests a fundamental shift in the banking system away from an origination for sale/securitization credit environment to a more traditional bank lending model.
With deposit balances shrinking (if not in absolute terms, certainly as a percentage of loans) and capital levels at peak (or beyond) for this credit cycle, it is not clear how the banking system will be able to move smoothly to a re-intermediation model.
While today many bond investors will celebrate the improved transparency of bank balance sheets versus opaque special-purpose commercial paper vehicles, industry-wide consolidation means there are fewer bank names to choose from. How much single name exposure a pension fund or money manager may want of Citigroup or JPMorgan remains to ultimately be seen.
In any case, I would watch your local papers for deposit offers. Irrespective of where interest rates go from here, I expect that advertised CD rates will begin to better reflect the true funding needs of our largest banking franchises. And the race is on.
Position in SKF.
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