KBRA Analytics Releases The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show

KBRA Analytics releases this month’s edition of The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show.

With the Fed on the verge of lift-off, this month’s newsletter, Bank Treasurers Have Options, frames the latest turbulence in interest rate markets against the history of the 2s-10s Treasury yield curve circa 1979 to 1982, when the yield curve steepened and inverted several times as the Fed was last engaged in a serious war on inflation. Discussing highlights from the minutes of the January 2022 Federal Open Market Committee (FOMC) meeting, the newsletter examines the shift higher in Treasury yields from the perspective of their relative term premia and how bank treasury strategy is focused on keeping bank balance sheets the same or even more asset sensitive to take advantage of the rate hikes they expect to follow this year. The economic and rate assumptions in the 2022 Comprehensive Capital Analysis and Review (CCAR) are reviewed for insights as to how high regulators believe the ceiling on interest rates will be in this coming rate hiking-cycle compared to the last cycle between December 2015 and December 2018.

The prospect of higher interest rates has stoked the valuation of bank deposit franchises, raised acquisition costs, and, as the newsletter discusses, will likely cool the pace of recent mergers and acquisitions activity. Yet, as the piece also reports, optimism by capital market managers, bank and nonbank, is unflagged, with demand up in the loan market based on the Fed’s latest lending survey. Since banks report that much of their activity is in floating rate assets, which fit in with their broader asset-sensitive balance sheet goals, the newsletter closes by looking at the adoption of the Secured Overnight Financing Rate (SOFR) as a replacement for the London Interbank Offered Rate (LIBOR) in small business lending. According to the Alternative Reference Rates Committee, $100 billion in syndicated leveraged loans benchmarked to SOFR were issued in January 2022, many multiples of new issue nonbank-originated LIBOR facilities.

The Bank Treasury Chart Deck analyzes the change in Federal Deposit Insurance Corporation (FDIC) bank net interest income during the last three rate hiking cycles since the turn of the 21st century—between Q2 1998 and Q3 2000, Q2 2004 and Q2 2006, and Q4 2015 and Q4 2018—and how changes in rates and volume impacted growth. We then show how the front end of the yield curve, from 1-month to 12-month, has already adjusted for the expected rate hikes over the course of the year. Since the beginning of the year, when banks were barred from originating new loans with LIBOR, the futures and options markets have been studied by SOFR-watchers to see how trading volume and open interest has changed in the Eurodollar and SOFR contracts. The remaining slides examine how recent shifts in the liability side of the Fed’s balance sheet tracks with changes in the aggregate balance of bank deposits.

In this month’s edition of Bank Talk: The After-Show, Van and Ethan discuss bank operating leverage, a measure of efficiency that compares the growth of net revenues to the growth on noninterest expenses and how this measure relates to the traditional efficiency ratio. Ethan explains how analysts are focused on operating leverage now because they are forecasting accelerated net interest income growth as the Fed raises rates. The two also look at recent trends in salaries and benefits expenses and how, for all of the industry’s technology investments and branch closures, it has still not been able to materially capture savings that fall to the bottom line.

Click below to view the reports:

• The Bank Treasury Newsletter Chart Deck: February 2022
• Bank Talk: The After-Show: February 2022
• The Bank Treasury Newsletter: February 2022

About KBRA Analytics

KBRA Analytics, LLC (KBRA Analytics) is our premier product platform for high quality data and advanced analytics. Our seasoned teams of industry specialists across each product provide unparalleled insight creating a foundation of deeper analysis and rapid discovery for users. KBRA Analytics is an affiliate of Kroll Bond Rating Agency, LLC (KBRA). KBRA is a full-service credit rating agency registered in the U.S., designated to provide structured finance ratings in Canada, and with credit rating affiliates registered in the EU and UK.

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