More loans, growth in usage of credit lines. Strong consumer credit card spending activity and slower payment rates on credit cards.
Allowances for credit losses are 1.88% oif period end loans. $200M addition to allowances for credit losses due to increased volume of loans, and uncertainty of the economic environment.
11.3% increase QoQ and 20.6% growth YoY for net interest income. NII growth into Q4 and beyond it. Probably the pace of growth changes in the industry, as deposit BETAs changing, loan growth rates are strong, may not stay as strong, as we move forward through time.
Net interest margin in Q3: 2.83%
Efficiency Ratio: 57.5%
Loan balances are up 3.9% for Q3 (over Q2). Average balance deposits (average): Up 2.1%.
Declines in mortgage revenues and payment services and treasury management fees. Lower refinancing volumes. Payment services fees dropped slightly, due to pre-paid card volume declines (e.g., benefit cards) as they they are more profitable for banks.
Payments revenues (current and forward): credit cards shifted, but fairly strong level of spend (up 10% YoY and up 30% since Pandemic). FX rate on the pound hurt them. Mix of categories is consistent, from hard goods to services, and to non-discretionary from discretionary. Overall levels are still strong.
Historically, consumer deposits increased over time for the past 2 years, and now they are stable, not shrinking dramatically for the past 2 quarters. They are now flat for Q2 and down modestly in Q3. Expect a moderation of spend, but not seeing it yet. Payments revenue growth of high single digits for 2023. Still realistic. Volumes strong, but there is a spend shift (but didn't say where). Inflation should raise the amount of purchases even if the volume drops. Trust deposits are up, and are now 15% of our base. Consumer doing ok. Deposit BETAs are 30% in Q3, up from 20% in Q2, and we expect mid-high 30s in Q4. As rates rise, and the FED is more competitive, we expect to see mid-30s%, more conversion to interest bearing.
FX impacts out of the UK, and volatility, hurt their merchant revenues.
Expenses increased 1.9% QoQ and 4.8% year over year, excluding notable items like preparing for a merger.
Forward Looking Guidance for 2022 (Q4 and Full Year 2022):
Revenue to increase 5% to 6% in 2022 over 2021.
Core expenses up ~2%
Reduce non-interest income.
Taxable rate to be around 22% to 23%. Fee revenue will be lower, but net interest income will be higher.
Credit quality will stay low this year, but should trend higher to historical norms over time.
Basel III Standardized Approach
These numbers came from the executive discussion during the call:
Acquisition of Mitsubishi retail should be positive and provide a 20% return on equity.
Acquisition at scale in their core markets. Less synergies than expected, but earnings should be same. Accretion of mark to market levels (guided in the past). What does that mean? 40% to 50% accretion levels. Not changing guidance on the acquisition.
Manage the balance sheet in a very prudent way. Higher profit relationships. CAT2 by end of 2024 (up to $1T in deposits). They should hit about $800B after the acquisition.
Credit is benign. No early stage warning signs. Worried about the future. Economic slowdown driven by lower confidence levels and reduced spending by consumers and business.
Prudently manage equity, capital and growth.
Balance sheet is strong.
Manage the company for the long term.
Tech infrastructure was invested in...but now positive operating leverage should grow. Focus on the acquisition, and no guidance on operating leverage growth.
Thank you to our employees.
Questions on capital structure:
Widening of the interest rate mark. Looked at 50 bps mark up. Masking on the buy side. 100bps lower than what you are giving us. How is the street getting the math wrong, hedges, or something in the deal protecting UBS. Interest rate moves should be hitting them much harder. Acquisition: Make Whole Agreement to make whole available for sale securities. Also, assumptions on the duration of the AFS / HTM portfolio. Also, manage the portfolio prudently.
$6.25B of tangible assets. Make whole provision on investments, but not necessarily on loans.
Interest rate marks. Loan portfolio quality overall (slightly better, they think).
Mark to market final impacts will depend on many things.
53% HTM vs. 47% AFS, and about 6% of their securities are not impacted by interest rates.
They moved some securities in late July as rates dipped.
Depositors will move from non-interest bearing to interest-bearing as quantitative tightening continues, and interest rates rise. They work on this and maintaining operating balances (e.g., company uses of cash). $130B balances of money market funds. It's a pricing decision whether to bring them on/off balance sheet, and consumer choices.
Residential mortgage business. Gain on sale margins lower. Still excess capacity in the mortgage origination business. Servicing margins dropping too. Gain on sale was down in Q3 (half driven by mix of correspondent and retail origination) and the rest is type/mix of loans.
CRE: important business for us. Large corporate REITS (saw some growth). Homebuilders are pulling back, withdrawing from projects. Middle market CRE pricing still pretty competitive, but extending terms. Pressure in the middle market space.
Portfolio duration is a little over 5 years. AOCI can be modeled that way. Little longer than 5-year period. Restructuring the books options? Might remix the securities portfolio, e.g., increasing HTM.