ERICOPOLY

This is one of the things I question. I know there hasn't been enough demand from highest-credit borrowers to soak up all the deposits. But hasn't there been a class of borrowers shut off from credit that normally had access to it? In July 2011 I had a net worth in excess of $5m, and I couldn't get a 100k loan at a 50% LTV on a 4-plex in Sacramento with a 16% gross rental yield. My only other debt was my house mortgage -- less than 400k. They seem to be somewhat full of shit when they say they can't find anyone to lend to. Hmm..that's interesting. If you don't mind answering, what banks did you approach? The big ones, Wells Fargo, Bank of America, plus local banks (although in Sacramento they were in distress). I had a mortgage broker who was saying nobody was interested. Excuses were that I had no history as a landlord. My mother was here last week complaining that she can't get a credit card today. She is denied at Wells, BofA, and JPMorgan. She has never had a card before, always used my father's. They are married, never defaulted on a loan, house worth $3m and fully paid off. No debts! Over $1m in savings. But no, she can't get a credit card. My father was denied in late 2011 trying to get a $600k line of credit for his home. He wanted to use the money to buy out his siblings for the family Palm Beach cottage near Sydney. He was going to put $1.9m of his own money down, and use the $600k from the line of credit for the rest. So he would have total real estate of $5m with only the $600k lien on the primary residence. Nope, denied -- Wells Fargo. Then there is my sister and their husband -- more than $500k in liquid assets, net worth above $2m, both employed at USC, and their HELOC was frozen on them. Huh? Not sure what bankers are talking about when they claim there are no creditworthy borrowers.

This is one of the things I question. I know there hasn't been enough demand from highest-credit borrowers to soak up all the deposits. But hasn't there been a class of borrowers shut off from credit that normally had access to it? In July 2011 I had a net worth in excess of $5m, and I couldn't get a 100k loan at a 50% LTV on a 4-plex in Sacramento with a 16% gross rental yield. My only other debt was my house mortgage -- less than 400k. They seem to be somewhat full of shit when they say they can't find anyone to lend to.

Jay, You raise a good point. They will likely lose some cheap deposits as rates rise. Fortunately, they won't have to immediately replace them dollar for dollar with more expensive ones. They presently utilize only 85% of deposits, versus 97% in 2006. And new loans will be funded (for a time) with deposits that are freed up as problem loans are runoff. Total Loans and Leases 2006: $652b (97% of deposits) Today: $924 (85% of deposits) Total deposits: 2006: $672b Today: $1,090 Separately, I was curious about how the LT debt picture has changed. LT Debt: 2006: $130b @ 5.41% Today: $258b @ 2.65%

Me too. I'm in no way an expert on any of this. But I had to start a dialogue so the experts could set me straight. Otherwise, I don't learn anything. Plus, I like it when people realize how little I understand -- sometimes I think people give me too much credit simply because I had a great 10 years which was due to cheating off of others' research. I like to be the underdog. What about their long term debt? That gets re-priced as well (to the benefit of the bank). In BAC's case, that's $258billion -- 28% of all loans and leases. Then there are variable-rate loans. I am trying to find that figure for BAC. And MSR rights go up in value when rates rise -- this is because they won't be refinanced.

I've been comparing the quality of the BAC deposit base today versus where it was in 2006. I'm wondering whether the NIM should increase to a higher than historical level as rates rise. Today, 33% of deposits are noninterest-bearing. In 2006 it was 26%. Today, 84% of interest bearing deposits are comprised of the categories "Savings" and "NOW and money market deposit accounts". Back in 2006 those categories were only 61% of interest bearing deposits. Listed below I have the total amount deposited in each category and the interest rate paid on those deposits. You can see that back in 2006 when rates were higher, the "Consumer CDs and IRAs" cost 416bps, whereas the "NOW and money market deposit accounts" cost only 180 bps. So they have done a good job with moving away from the far more expensive "Consumer CDs and IRAs", and relying more on "NOW and money market deposit accounts". Plus, relying more on noninterest-bearing deposits. Next time rates go up to prior levels, things should be more profitable. Cheaper deposit base than before. - Eric 2013: 84% of interest bearing deposits in cheapest categories (first two categories listed) 44b @ 0.05% Savings 508b @ 0.08% NOW and money market deposit accounts 81b @ 0.56% Consumer CDs and IRAs 24b @ 0.42% Negotiable CDss, public funds and other time deposits 657b total domestic interest bearing deposits 69b total foreign interest bearing deposits 364b noninterest-bearing deposits (33% of all deposits are noninterest-bearing) 2006: 61% of interest bearing deposits in cheapest categories (first two categories listed) 34b @ 0.78% Savings 218b @ 1.8% NOW and money market deposit accounts 144b @ 4.16% Consumer CDs and IRAs 12b @ 3.97% Negotiable CDss, public funds and other time deposits 409b total domestic interest bearing deposits 86b @4.39% total foreign interest bearing deposits 177b total noninterest-bearing deposits (26% of all deposits are noninterest-bearing)

Here are some of BAC's historical numbers which are considerably higher than today: Net Interest Yield: 2003 3.36% 2002 3.75% 2001 3.68% 2000 3.20% 1999 3.45% The business mix is different today (Merrill) and that might be dragging down NIM, but look at what BAC achieved in their Consumer and Commercial Banking: 2003 4.67% 2002 5.26%

A. Gary Shilling thinks we'll get full employment once the deleveraging is over. Less than 5 years from now.

Bruce Thompson put out a mid-$7billion figure for how much a 200 bps parallel shift in interest rates would benefit BAC. How could that be if not for the noninterest-bearing deposit base? The other deposits would rise in cost by 200bps. And what a coincidence, 2% of their noninterest-bearing deposit base is roughly the figure he threw out. So that's where I'm coming from with that. A couple of things that I don't presently have BAC's quantities for: their mix of adjustable interest rate loans proportion of their loans near maturity (to be rolled at higher rates) Regarding AOCI -- doesn't matter if we're just talking about 200 bps. The extra $7+b income that Bruce Thompson stated would boost earnings by 45 cents per share (after-tax, fully diluted). That's a $5 gain in the stock at 11x earnings. The book value has been $20 for quite some time, but not the stock. That's because of the earnings. Book just doesn't matter. Stock buybacks also eat up capital -- and they don't boost earnings the way Bruce Thompson is talking about. It doesn't make sense that people want stock buybacks but fear a 200 bps rise in rates. You get more earnings bang for the buck from the rise in rates.

And that's "usual" environment? Yes. I see, everything is east of Callifornia because if you keep going east, you get back to California! Similarly, everything is "post deleveraging" environment.

So an example. Take BofA: $363.962 billion in non-interest-bearing deposits That's 1/3 of their deposit base. The low rates are killing their ability to earn. Were the risk free rate on short-term money to rise by 2%, they'd get $7.2 billion more profit from those non-interest-bearing deposits.

And that's "usual" environment?

The base rate is unusual. Once it goes back to the usual level, the banks make more money on the non-interest-bearing deposits. What is a "usual rate" and what is an "unusual rate"? 2% would be more usual/policy-neutral. today's rate is unusual/policy-accommodative

non-interest-bearing deposits. Their value will be seen when the base rate goes back up.

Thanks. In 1900, when the rate was 3%, you actually got to keep the entire 3% (no income tax). And it was backed by gold, so you were actually making a real return on the money you lent risk-free. Today when the rate is 3%, and I'm in the 40% tax bracket, I get to keep 1.8%. The very same people paying the interest on the bond are taking 40% back in taxes. That 1.8% is not backed by gold. It could very well be a negative real return. Today's interest rates are not comparable to those in 1900. One gives you a real return, one probably won't. Yet the interest rates are the same.

The base rate is unusual. Once it goes back to the usual level, the banks make more money on the non-interest-bearing deposits.

Are you being facetious? It was the terminal point in the plot of long term interest rates that Fairfax was presenting a few years ago, and this saves me time looking for other data.

Should we not require higher rates to compensate us for not being able to exchange our dollars for gold? Risk adjusted, can we honestly compare the interest rate today to that of 1870? How much of that interest paid can we keep? Before 1913 there was no income tax.

I believe A. Gary Shilling was at the Fairfax dinner/meeting this year, predicting a market decline. He has been right sometimes, but take a look at this one from 10 years ago: 4/14/03 I foresee real returns of 5% to 6% a year on stocks. But while “real” usually means “inflation-adjusted,” in this case, it means “deflation-adjusted.” Nominal returns will be 4%, including reinvested dividends, and deflation will add 1% or 2% a year… http://www.cxoadvisory.com/3767/individual-gurus/gary-shilling/ Or this one, also from 10 years ago -- he forecast corporate profits rising only 1% a year: 6/23/03 On balance, in the years ahead, count on low corporate earnings growth. If you assume that I’m right with my mild deflation forecast, Treasury yields will decline enough to justify current p/es. Then stock prices will go up about 1% annually–only as fast as profits rise over the next decade.

I remember they used to purchase out-of-the-money calls to reduce potential losses on their short position. Have they ever mentioned why they stopped that practice?

Calling $10b preferred will leave them with slightly under $6b preferred remaining. I suppose that's not a bad thing.

What if credit losses hit 3% in a prolonged recession? You are giving examples that don't take into the cost of bad times. Sure, you can make twice as much profit as the risk free rate, but get hosed when things go bad. Instead, what if risk free rate were 3% and you lend at 4%. That's only 33% more than the risk-free rate during good times, but you are still profitable during bad times when losses are running at 3%. Even if those times never come, you need to pass these severe-adverse scenarios the Fed dreams up where you have spiking unemployment and spiking interest rates. I don't see how you are rewarded to lend much out at these low rates where you aren't being compensated for the potentially high default rates and potential spike in interest rates. I should think those scenarios would make you want to sit on your deposits and be very, very, careful loaning them only to people who don't need the loan in the first place.

You can't afford to have too much of the portfolio go sour if the economy weakens. So you keep it very high credit quality because there is no fat NIM to cushion the blow when it comes. During the onset of the 2008 crisis, I believe the profitability of good loans initially widened as rates were cut (lowering cost of deposits). That was a big cushion to help fight off the mounting loan losses. Next time, there won't be any such effect. So by having a presently tight NIM with no chance of deposit costs dropping in the next crisis, don't banks have to be more prudent? It seems to me like that's the case.

jay, I'm thinking about a scenario where (think of Bank of America) you have hundreds of billions on deposit that pay no interest. These deposits are non-interest bearing deposits, so when there is a parallel shift in the yield curve they will be more profitable. Right now the net interest margin is razor thin, so you have to be very, very, very, very careful about who you make loans to. More careful than normal because you need to reduce the amount of loans that go bad in order to preserve the thin profits from the loans that don't go bad. Even after doing that, you are still at record-low profitability from your deposits. Suppose the base rate goes up to 2%. The rise in profitability will incentivize putting more of it to work. Given that each loan has the potential to make much fatter profits, you can afford to lend to less creditworthy individuals. Why? Because you don't have enough highest-credit people to lend to -- so otherwise those deposits sit there underutilized. It takes a relatively healthy NIM before you can profitably lend to people lower down the credit quality spectrum. Thus I can understand why loan to deposit ratios are slight right now. makes sense. They have to be low, because NIM aren't high enough to support lending to lower quality borrowers.

Observation: A bank with non-interest-bearing deposit base can take on more risk with Fed base rate of 2%. There is more profit to be made if things go right with a given loan, thus it can help defray the costs of the loans that go bad. Therefore, the bank can afford to make loans to less-creditworthy borrowers. Just an observation. Wondering how much the slow economy is being hurt by low rates. It's being helped in some ways, but surely hurt as well.

I thought the approval was for 12 months. Initially approved in March, that means it runs until next March when they get the next 12 month approval. So that gives them 6 months to do 3.1billion.