Balance Sheet Strategies for 2018: A Roadmap to Outperform Your Peers Jim Reber, President August 13, 2018

Transcription

1 51 st ANNUAL CONVENTION Balance Sheet Strategies for 2018: A Roadmap to Outperform Your Peers Jim Reber, President August 13, 2018

2 Yield Curve August 6 2

3 What is Normal? 25yr Avg 25yr Average 10yr Average 5yr Average 8/6/2018 Slope to Prior Point Spread to Funds 10yr Avg Slope to Prior Point Spread to Funds 5yr Avg Slope to Prior Point Spread to Funds Current Slope to Prior Point Spread to Funds Fed Funds mo T-Bill 2.46 (0.19) 0.31 (0.19) 0.45 (0.06) mo T-Bill (0.04) yr Treas yr Treas yr Treas yr Treas yr Treas yr Source: Vining Sparks, Bloomberg 3

4 Fed Statement August 1 Economic activity has been rising at a strong rate Further gradual increases will be consistent with sustained expansion Household spending and business fixed investment have grown strongly 4

5 Summary of Economic Projections Sources: Federal Reserve, Vining Sparks 5

6 Interest Expense Fixin To Blow Source: CBO, Treasury, Bloomberg, Vining Sparks 6

7 Market Barometer for Inflation Inflation expectations have risen, but still anchored 10-year market inflation expectations as estimated by TIPS 2.10% 2.00% Source: Bloomberg 7

8 Real Returns Beginning to Normalize 3 Yr UST vs Core PCE, Source: Bloomberg 8

9 Source: Bloomberg 9

10 Implications of a Flattening Curve Less benefit to extending maturies/durations Less benefit to mismatching assets/liabilities Longer-durated assets can hold their value compared to shorter ones NIM s initially rise, then revert to mean 10

11 Banks Are Positioned Well For Rising Rates The primary exposure is to declining rate scenarios from both an earnings and economic value standpoint. 5% Earnings at Risk 1.8% 2.6% 2.1% 10% Economic Value at Risk 4.8% 5.9% 4.6% 0% -3.7% 0% -10% -11.2% -5% -10% -8.8% -8.0% Dn 300 Dn 200 Dn 100 Up 100 Up 200 Up % -30% -40% -31.9% -39.9% Dn 300 Dn 200 Dn 100 Up 100 Up 200 Up 300 Note: Assumes an immediate and parallel shift in the yield curve using a static balance sheet. Source: Vining Sparks 11

12 IRR Profile - Asset Sensitive Banks have reduced their exposure to higher rates in recent years, but have reduced asset sensitivity over the last year. Earnings at Risk +300 bps 4.0% 2.9% 10.0% 2.1% 2.0% 5.0% 0.0% 0.0% -2.0% -5.0% -4.0% -3.5% -3.4% -10.0% -6.0% -5.1% -15.0% -8.0% -20.0% Q4'17 Economic Value at Risk +300 bps 4.6% 0.4% -7.5% -10.0% Q4'17 Note: Assumes an immediate and parallel shift in the yield curve using a static balance sheet. Source: Vining Sparks %

13 Less Penalty to Shorten Assets 13

14 Less Penalty to Lengthen Deposits FHLB Funding Notion: $5mm Payments and Resets: monthly, act/360 both sides Customer Pays Fixed: See below Start: See below Maturity: See below Customer Receives Floating: 1-month LIBOR Current 1-Month LIBOR 2.08% Insured Money Market Deposits Notion: $5mm Payments and Resets: monthly, act/360 both sides Customer Pays Fixed: See below Start: See below Maturity: See below Customer Receives Floating: Fed Funds + 25bps Current Fed Funds 1.91% Start Spot 1/19/2019 7/9/2019 Term (from) Start 3 Years Years Years Years Years Years Years Years Start Spot 1/19/2019 7/9/2019 Term (from) Start 3 Years Years Years Years Years Years Years Years

15 Brokered Deposit Rates 15

16 Good News from FASB?! New ASU for hedge accounting expands universe of assets eligible Documentation requirements are more reasonable Publication: Webinar: 16

17 LIBOR Phase-out Source: Bloomberg 17

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21 Latest from ARRC Guidance on fallback language for LIBOR contracts: files/2018/arrc-principles-july

22 Tax Reform Tax Cuts and Jobs Act Maximum corporate rate cut from 35% to 21% Pass-through organizations maximum effective rate cut from 39.6% to 29.6% Maximum individual rate cut from 39.6% to 37% Municipal bonds have some built-in price protection 22

23 Who Owns Tax-Free Bonds? Source: SIFMA 23

24 Banking Industry Earnings Q Source: FDIC 24

25 Municipal Bond Supply Source: SIFMA 25

26 AA BQ Muni Spreads Before Source: Bloomberg 26

27 and After Source: Bloomberg 27

28 In Conclusion: Two more tightenings should occur this year; five by end of 2019 Flattening curve plays right into banks needs LIBOR-to-SOFR will begin to take shape in 2019 There should be support for muni prices from several fronts Banks are poised to do very well in

29 Upcoming Education October hours of CPE Introduction to Fixed Income Investing Prerequisite of Balance Sheet Academy 29 29

30 Upcoming Education Free CPE All new material 4 different speakers 30 30

31 Arrrggghhh! Intended for institutional investors only. Although the information included in this report has been obtained from sources we believe to be reliable, we do not guarantee its accuracy. All opinions expressed in this report constitute the judgments as of the dates indicated and are subject to change without notice. This report is for informative purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any product. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. Member FINRA/SIPC. Jim Reber