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Jeff Saut: Money Flows Back to Banks


Prepare for reintermediation.

Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

TIAA-CREF defines disintermediation as, "The withdrawal of money from low yielding financial accounts, such as saving accounts, and the reinvestment into higher yielding securities such as Treasury bills. Banks, in an effort to keep the money, may pay depositors higher rates. In order to afford the higher rate, banks will then charge their borrowers higher interest rates. This can possibly lead to tight money and reduced economic activity."

Disintermediation is a term coined decades ago, when money-market funds proliferated. People took their money out of the banks and placed it into higher yielding money-market funds. Recently, however, the reverse has been happening. With money-market funds' yields near zero, participants are taking their money out of said funds and purchasing higher yielding certificates of deposits (CDs). This is a not unimportant development.

Indeed, while much is being made of the injection of government funds into the equity side of various banks' balance sheets, banks don't make loans on their equity. Sure, an increase in equity improves the banks' capital ratios - but banks lend on their deposits, and -- with the recent surge of money into CDs -- can it be very long before banks loosen up their purse-strings and begin lending again?

I call this flow of funds back into the banking complex "reintermediation," which should be viewed as the exact opposite of disintermediation. As Kelly King, CEO of BB&T (BBT), recently suggested:

"...What does the economic engine look like going forward? ...I mentioned earlier this 20-plus-year period of disintermediation as huge amounts of assets left the banking balance sheet and went into the capital markets. That's gone for a long time. It may be back one day, but I think it's gone for a long time. We saw huge amounts of traditional deposits, CD-type deposits, leave our system and go into mutual funds... You are (now) seeing that money come back in the CDs, albeit at lower rates.

"So we're getting more deposit inflow at lower rates. We're getting more loan inflow at higher rates. Spreads are improving. They will continue to improve. So I think going forward, even with lower aggregate economic activity, which I believe will be the case, good banks will have very good balance sheet roads and very good spreads resulting in very good margins. Now, I don't think any of us ought to be sitting here thinking about going back to the 1990s and looking for 15% to 20% growth rates. I don't think that was healthy. It wouldn't be healthy now and it's not going to happen.

"But for the first 10 or 15 years of my career, if you could grow loans 6% to 8%, deposits in the same kind of category and get good pricing and control your costs, you could make a lot of money. And I believe we are heading into that period. Once we get through this cycle (12 to 18 months) we are in for 8 to 10 years of really good operating conditions for good spread lending institutions like [BBT]."

"Once we get through this cycle, we are in for 8 to 10 years of really good operating conditions for good spread lending institutions like [BBT]."
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