By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.

Here is our initial, brief read on the US macroeconomic situation and the top banks generally. 

We saw deposits were weak, either because people are moving money to gain yield, or because they are spending their savings.

We saw loans rising, most likely because they are now more profitable for banks. More loan volume across the board.

Net Interest Income was significantly higher in Q4/2022 than for the prior quarters of the year, and prior years. Bankers said to be cautious to extrapolate Q4 into 2023, and expect 2023 Net Interest to be less than 4x 2022/Q4.

Most of the bankers have hedged or swapped out their asset sensitivity to low rates, or are consciously working through yield, duration and maturities to limit the impacts. Most bankers were happy to be investing at 3.5% when long bonds a year ago yielded much less.

There was significant less asset management and investment management fee revenue across the board. Assets under management (AUM) was weaker due to weak equities and bond markets. Also, there was little if any IPOs, Venture Capital spin outs, mergers and acquisitions, and likely (not mentioned) underwriting of new debt. This was a weak spot for all banks.  However, all four were investing in their asset management teams of people.

Net Charge-offs rose for all banks, and were rising, but still below pre-pandemic levels. We saw reduced credit quality in the consumer space, or what we called credit risk weakening.

All the banks had higher expenses. Some of the banks saw or expected increases in their operating leverage, while others did not. It did not matter, all banks were increasing their non-interest expenses.

The banks had various forecasts of the macro-economic and monetary policy situation in 2023. They all expected interest rates to rise in 2023, but the size of the raise was smaller. I seem to remember 0.75% or 75 basis points was a typical rise for 2023. The banks also expected a softening economy or light recession. I am trying to remember, but I think $JPM suggested unemployment would rise to 5.5%.

We also tweeted it out.

We ran the numbers based on Dec 30, 2022 market close data for indices on US Treasuries and MBS securities (UMBS 5.0).  The analysis will be re-confirmed this week with a fresh set of eyes. It assumes that CFR did not buy any new investments in Q4 (we use Q3 investments to do our valuations).

Cullen Frost gained value on their investments, which means they likely will have positive AOCI. We guess their bets on buying long assets with short money will pay small, but positive dividends in Q4/2022. We assume that CFR did not buy swaps to protect themselves against rising interest rates in Q4, as those would likely expire out of the money, and cost the bank the premium.

The gains were especially large in the residential mortgage-backed securities (RMBS) they hold. 

This trend was quite negative and dramatic in Q2 and Q3 while interest rates were rising. However, rates fell into year-end and this will help the capital position for US regional banks, like Cullen Frost.

GLTA