Charting Banking I: interest spread
by PlanMaestro
Let’s start with the most important story in banking today, and it is not commercial real estate. It is the significant improvement of the interest spread of new loans versus deposit costs.
This spread reflects both the marginal profitability of generating new loans and resetting those deposits to new lower interest rates. In time, this spread is driving the significant improvement in net interest margin (NIM) of most banks as soon their non performing assets (NPAs), that are not accruing interest, start to stabilize. Some call it the big bailout, but historically this has been the way that lower interest rates has stimulated the economy. As soon, as banks strengthen their balance sheets and competition for loans restart, new loans interest rates should also fall down.
The following is a chart from the recent Zions Bancorporation (ZION) investors day. This bank is still is shaky and has not been as aggressive as others in recognizing NPAs but the information disclosed was excellent. And this graph tells the tale.
No Position
Hi PlanMaestro,
Would you please take a look at PVSA? This banks seems cheap, and NPA is quite low. However, its interest spread is a mere 2.0%, and Investment securities held to maturity is 551,080 (fair value of $505,599 at March 31), so I am wondering if we should subtract the difference which is around 50,000 from the book value. If we do this, the total tangible common equity drops significantly to 148-50-29-31 = 38, so price/book is actually 150%, and also texas ratio becomes nearly 100%.
Would you please tell me what you think? I think they are not going to sell those securities held to maturity at any time, so the loss from fair value is temporary. Do you think we should subtract the above? And more importantly, given the low interest spread, do you think this bank is a good investment?
Thanks,
Zehua
The issue of using fair value is controversial, I would go through their portfolio and check if there are complex securities with OTTI (other than temporary impairment) risk. I do have PVSA in my watchlist and I liked the extremely low C&D and CRE risks given that it is mainly a home mortgage lender … but still passed:
* it was not very profitable in terms of net interest margin or pre-tax pre-provision earnings
* aggressive use of ARMs
Not sure how the ARMs are going to play out. Some of those resets may actually be beneficial to borrowers by lowering interest rates. But since these instruments were issued at the top of the bubble there may be some hidden frauds. I decided to pass for the moment since there are simpler ideas but might revisit it later.
[...] main reason for this recovery despite the heavy losses of several banks between 2007 and 2009 was the big bailout that we discussed in the first installment of the series. This low interest rate environment combined with lesss competition has been a boom for the [...]