Happy Sunday,
Consumers’ expectations of future price increases rose. Fed Governor says more tightening needed. Mortgage rates rose, apps for purchase dropped. SBA finalizes new rules for 7(a) program. Era of easy deposits is over. Concern over escalating FHLB use. Apple launches savings. First Republic’s coming to regret focus on the wealthy. Affirm upsizes ABS offering. Earnings coverage.
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Consumer Expectations of Inflation Rise
Fed Governor Waller says the central bank hasn’t made sufficient progress on inflation. Last week, he made comments that, so far, rate hikes haven’t made “much progress” and that further tightening is needed. Consumers expect prices to continue to rise. A preliminary reading from the University of Michigan shows consumers anticipate prices will rise by 4.6% over the next year, up substantially from 3.6% last month. The increase is largely attributable to gas prices. Still, the UMich consumer sentiment index actually rose month over month, from 62 to 63.5.
Image: Bloomberg
The U.S. 30-year mortgage rate rose by the most in two months, hitting 6.43%. Mortgage apps for home purchases dropped by 10%, the steepest decline in two months.
Facing continued price hikes, consumers are increasingly stretched. Some expanded government support programs, including expanded SNAP food benefits and Medicaid, have expired, adding additional stress to household budgets. The result is consumers are increasingly turning to credit for everyday expenses like groceries. A recent LendingTree survey found 1 in 5 BNPL users had used such services to pay for groceries Still, some lenders are tightening underwriting standards in advance of what many fear is an inevitable recession.
SBA Finalizes Rules on Flagship 7(a) Program
In a major win for fintech lenders, the Small Business Administration finalized a rule change that will allow more non-depository lenders to participate in its flagship 7(a) program. Effective May 12th, the SBA will lift the existing cap that limits the number of lenders that can participate to 14. However, don’t expect an immediate explosion in the number of lenders that can participate in the program. The SBA has said it will onboard new lenders in line with its oversight capacity. For now, that means just three additional non-depository lenders will join the program.
The decision comes despite concern from banks and credit unions, who have expressed concerns about higher rates of fraud associated with unpartnered “fintech” PPP loans during the pandemic vs. traditional banks. That comparison may be misleading, however, as many banks limited PPP loans to existing customers, while fintech lenders expanded access by casting a wider net. Further, the PPP program was a quickly rolled out emergency program with requirements that changed over time. Fintech lending under the SBA’s 7(a) program is likely to look far different from the pandemic-era PPP programs.
Banks Forced to Pay Up as Era of Easy Deposits Is Over
With rising rates and the fallout from the abrupt collapse of SVB and Signature Bank, the era of easy and cheap deposits looks to be over for all but the largest banks. Regionals like Citizens and First Horizon have reported having a harder time hanging on to customer deposits as competitors increase the rates of offer. The 25 largest banks have gained some $18Bn in deposits, while smaller banks lost over $200Bn.
The share of deposits that are interest-bearing vs. non-interest-bearing is also increasing for many banks as customers move idle cash in search of a return. As a result, many banks have been forced to hike rates on savings accounts and CDs. The return offered by money market funds is adding to the pressure. Total bank deposits fell in March by $312Bn.
Concern Over Mission Creep as More Banks Tap FHLB Advances
Banks’ lender of next-to-last resort, the Federal Home Loan Bank system, is attracting attention for its lending to banks that recently collapsed. Failed banks SVB, Signature, and Silvergate received a combined $30.6Bn in advances before their collapses.
The Federal Home Loan Bank system, as the name implies, was originally designed to boost liquidity to banks that originated mortgages to increase access to home ownership. FHLBs have played an outsized role in shoring up banks’ balance sheets this year as rates have risen and liquidity has drained from the banking system. FHLBs issued a record $485Bn in advances in March alone. While such advances provide liquidity, it comes at a higher price. FHLB loans typically charge 4-5%, vs. significantly less expensive deposit funding.
Apple Launches Savings with Partner Goldman
Another round of “will Apple become a bank” has swept the Internet commentator community as the company officially launched its Savings feature (no, it’s basically impossible for Apple to ‘become’ a bank, in the U.S. anyway). Apple partner Goldman is the underlying bank that will hold customer deposits. Apple Savings will initially only be available to existing Apple Card holders. The feature enables users to sweep their “Daily Cash” cashback into the savings account. Users can also add funds from a linked external bank account.
It’s expected that once Apple and Goldman iron out any bugs that the feature will be generally available in the U.S. The rate offered on the Apple Savings account, a punchy 4.15% APY, is raising some eyebrows. Goldman currently offers its Marcus savings customers just 3.90% APY.
First Republic’s Focus on the Wealthy May Complicate Any Government Assistance
Beleaguered First Republic Bank, which received $30Bn in deposits last month from a consortium of banks to stave off a bank run, has long focused on a specific customer segment: the wealthy. One product offering tailored to that group is exacerbating the bank’s current challenges. It offered large amounts of interest-only mortgages at low rates.
As rates have climbed, the value of those mortgages has fallen. At the beginning of the year, First Republic estimated the $137Bn worth of such mortgages would be worth $19Bn less if the bank was forced to sell them. That hole in its balance sheet is much larger than the $4.8Bn loss in held-to-maturity bonds and $3Bn in other write downs on its books.
The potential losses dwarf First Republic’s tangible equity, complicating any potential acquisition of the bank. Even if an acquirer paid $0, it would still need to realize First Republic’s losses on its own books, incurring substantial losses in the present, even if it intended to hold the assets to maturity. As First Republic’s cost of funding has risen above the interest rates it locked in on mortgages, the bank will continue to face pressure on its earnings as it struggles to find a viable path forward. Further, the focus on catering to wealthy clients by offering cheap mortgages could complicate the optics of any potential government assistance to the struggling bank.
Affirm Upsizes its ABS Offering
BNPL provider Affirm is increasing the size of its 2023-A ABS, with an additional $400Mn offering to be added to the initial $500Mn issuance in January. The $400Mn represents a significant increase in size, from the original $250Mn announced earlier in the week, signaling investor demand for the offering.
Looking at Finsight data, the yield on the additional notes has increased across all tranches. For example, the Class A tranche on the additional notes (with a WAL of 1.71) yields 55.5bps higher than the January issuance (with a WAL of 2.23 at the time of issuance). However, most of the increase in yield can be attributed to the 50 bps of rate hikes from the Fed.
Earnings Season and Focus on Deposits Continues
Amex CEO Steve Squeri, “When you look at competition, it’s just not the traditional banks. It’s the fintech[s]. It’s the big tech players and so forth.”
→ With Apple further expanding into financial services via a high-yield savings account, financial service providers must be aware of competition from a variety of places.
Source: PeerIQ
In week two of our earnings season coverage, deposits continued to be the point of focus for executives and analysts alike. To reassure investors, management gave greater disclosure into their deposit bases and spent additional time covering deposits on earnings calls.
Period-end deposits at banks were mixed, as consumers re-positioned certain deposits into higher-yielding alternatives and moved deposits to large institutions in the wake of the SVB and Signature Bank collapses. Discover (+4%), Synchrony (+4%) and Ally (+1%) reported QoQ increases in period-end deposits while Citizens ((5)%), Goldman ((3)%), Bank of America – Consumer ((2)%) saw deposits decline.
Discover (3.36%), Ally – Retail (3.16%) Synchrony (3.13%) all offered elevated average deposit rates on their interest-bearing accounts, which make up a vast majority of their deposit bases. In contrast, Citizens offered a lower average rate paid on deposits (1.28%), suggesting that consumers are searching for yield on their deposits. Citizens’ management did report that much of the decline in deposits occurred in the first two months of the quarter, with deposits “broadly stable” in March.
Even within Citizens’ results, it showed that consumers realigned their deposits in the search for yield. Citizens’ term deposits grew 22% QoQ while the lower-yielding checking with interest deposits fell (13)% QoQ and demand deposits fell (10)% QoQ.
Synchrony explained that much of its deposit growth came in the last three weeks of March (in the wake of bank failures), as the bank saw a net deposit inflow of nearly $700Mn.
Regional banks that have been under scrutiny reported mixed results. Western Alliance saw its stock price jump by over 20% on earnings, after reporting that it had managed to reverse the trend of deposit outflows in recent weeks.
Source: Western Alliance Earnings Presentation
Zions Bancorp reported larger-than-expected deposit outflows, down $2Bn (or ~(3)%) on a quarterly basis. Despite the outflows, Zions has not yet made use of the discount window or the BTFP for liquidity.
Comerica updated its deposit guidance, expecting deposits to fall 12-14% on the year, more than the 9-10% decline expected in early March. Comerica saw $3.7Bn in deposit outflows in the three weeks following the SVB and Signature Bank collapses, but management noted that the overall number of accounts increased.
Turning to consumer loan books, Amex (+4%), Discover (+4%), and Bank of America – Consumer Banking (+1%) all saw their average loan balances increase on a sequential basis. Discover’s personal loan (period-end) loan book rose 5% QoQ, “driven by higher originations over the past year and lower payment rates.” Additionally, Goldman reported flat installment loan growth while credit card loans dipped slightly on a sequential basis ($16Bn in Q4 to $15Bn in Q1).
We saw NCOs rise across the board as credit continued to “normalize” from historically low levels. While NCOs have trended higher, most companies still reported NCOs that are significantly lower than pre-pandemic levels.
On a quarterly basis, Synchrony reported a 99 bps increase, Discover reported a 59 bps increase, Amex (card member loan net write-offs) reported a 50 bps increase, Bank of America (Consumer) reported a 19 bps increase, Citizens (Retail) reported a 5 bps increase, and Ally reported a 4 bps increase in NCOs. Bank of America CFO Alastair Borthwick commented that, “Asset quality of our customers remains healthy and net charge-offs continue to rise from their near historic lows…[The] increase was driven by credit card losses as higher late-stage delinquencies flowed through to charge-offs.” Goldman reported NCOs of 4.6% for its consumer loans, up from 2.1% in 1Q22 and 2.8% for FY 22.
Despite inflation outpacing wage growth, consumers are still opening their wallets, with consumer spend solidly up from the prior year quarter (Amex +14%, Discover +9%, Bank of America +6%).
Auto originations continue to face headwinds in the form of higher rates and prices. However, while new and used car prices remain high, prices slightly dipped in February. As a result, we saw Ally (+3%) and Bank of America (+3%) report upticks in originations on a quarterly basis, even as originations were down from a year prior (Ally (88)%, Bank of America (1)%).
Source: Statista (Interest rates on 60-month new car loans in the U.S)
Goldman reported earnings after the announcement that it partnered with Apple to launch a high-yield savings account (with 4.15% APY, notably higher than the 3.9% APY offered on its Marcus high-yield account). The bank reported that it sold ~$1Bn of its $4Bn Marcus loan book, moving the remainder of the loans to HFS, leading to a $440Mn reserve release. Additionally, Goldman announced its intent to sell installment lending platform GreenSky just two years after announcing a deal to acquire it.
The decision to sell its Marcus loan book and plan to sell GreenSky comes as Goldman continues to refocus its consumer business. CEO David Solomon said the bank will continue to focus on its deposit and credit card platforms.
Discover reported progress on its cash back debit program. With the program, they will offer consumers 1% cash back on debit transactions, setting them apart from the vast majority of debit cards that offer no cash back or rewards. Discover plans to roll out the card sometime late in the second quarter or early in the third quarter. CFO John Greene also announced that the company recently received a ratings upgrade by Moody’s for its bank subsidiary and bank holding company.
In the News:
U.S. House Committee Publishes Draft Stablecoin Bill (CoinDesk, 4/17/2023) The draft bill includes proposals for a moratorium on stablecoins backed by other cryptos and a request to study a CBDC.
Credit Unions Revise their Approach to Liquidity After Bank-Run Crisis (American Banker, 4/17/2023) Regulators with the NCUA highlighted concerns around liquidity, rising rates and credit.
Coinbase Open to London Move if Regulatory Confusion Remains in the US (altfi, 4/18/2023) CEO Armstrong called for more comprehensive crypto regulation, saying if they do not see regulatory clarity emerge in the U.S., they may consider moving elsewhere.
Lighter Fare:
A Viral AI-Generated Drake Song by ‘Ghostwriter’ Has Millions of Listens (Vice, 4/17/2023) Is AI-generated music the future?
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