Micro Trends in Asset/Liability Management-as viewed by AMG!
AMG provides ALM consulting services and reports to community banks in 22 states, and we review a broad array of balance sheets, pricing strategies, and business plans. It is impossible to make definitive statements regarding trends across the board because of the many markets and types of banks we work with but we can, at least on an antidotal basis, point out some of the recent “behavior” we have observed.
First, is seems loan demand is still quite strong across the board. Most banks have increased their loan portfolio (YOY) while slimming the investment portfolio. A surprisingly large group however, seems to have increased loans while maintaining, or nearly maintaining, the size of the investment portfolio. In almost every case these banks have increased their leverage by borrowing overnight or tapping into some other source of wholesale funds (Brokered Deposits). In other words, for the most part, these banks are borrowing overnight while funding longer assets.
Interestingly, in the last six months the Yield on Earning Assets (YEA) in the larger UBPR groups seems to have remained the same (4.00%) while the AMG peer group seems to have decreased slightly, from 3.80% to 3.78%. YEA is a dependent on many things with the most important being Loan to Deposit ratio and the percentage of fixed rate loans to variable rate loans. Obviously, banks that are more “loaned up” are less dependent on the investment portfolio and banks making fixed rate loans should be demanding a greater rate than those booking variable rate loans.
Very few banks have increased the rate paid on interest bearing liabilities as most Cost of Funds continues to drift lower. The Fed’s 25 bps increase was pretty much a non-event regarding rates paid and the COF of most institutions. Given the recent negative rate events in Japan and Germany, and the Fed’s reaction to these and other global events, current COF seem secure for a good part of 2016.
Consistency also seems to be the theme with non-maturing deposits. The continuance of lackluster rates offered on time deposits coupled with stock market decline, NOW, Money Market, and Savings Accounts continue to maintain their balances. We wonder how long the balances in these accounts will be viable but there is absolutely no end in sight if “rate” is the determining issue. Even with the increased loan demand “funding” does not seem to be an issue in most banks and overnight borrowing rates are too attractive to dismiss.
Lastly, Portfolio Managers are busy selling bonds. Agency volume on Tuesday was 8.1 billion compared to the average daily volume of 4.8 billion. Large Municipal bond bid list swamped traders signaling that most think the 1.74% yield on the ten-year treasury will not last long. Many banks were selling bullet and callable agencies and going into MBS in the 10 and fifteen-year ranges for chase flow.
Call AMG at 800.226.1923 if you have any ALM issues or want to discuss our service, thanks.