Banks outperform the market for the week and full quarter. The KBW Bank Index (BKX) fell 0.28% last week, while the KBW Regional Bank Index (KRX) gained 1.46%%, but both outperformed the S&P 500, by 46bps and 220bps, respectively. For the month of September, the BKX fell 3.94% (outperforming the market by 93bps) while the KRX dropped 5.71% (underperforming by 84bps). Both indices outperformed for the full quarter; though the BKX declined by 2.4%, that represented 125bps of outperformance, and the KRX rose 1.43% in Q3, representing 508bps of outperformance. This came despite some key macro negatives; the 10-year Treasury yield rose 48bps in September and 76bps for the quarter, making new cyclical highs, while WTI crude (spot) rose 10% for September and 30% for the quarter.
Figure 1: The KBW Bank Index
Source: FactSet
Figure 2: The KBW Regional Bank Index
Source: FactSet
Modest recent activity. Eastern Bankshares announced acquisition of Cambridge Bancorp on September 19 was the second largest transaction of the third quarter, with a value of $521 million. There were also a couple smaller deals last week, but overall just seven bank acquisitions in September and 30 for 3Q23.
Figure 3: 3Q23 announced bank acquisitions
Source: FactSet
Jefferies 3Q23 results. Jefferies saw a rebound in underwriting revenues, particularly in fixed income, which it attributed to the stabilization of inflation and interest rate concerns. Advisory revenues bounced 32% off the quite low 2Q figure but were still down 30% year-over-year, reflecting the continued sluggishness in activity.
Figure 4: Jefferies results
Source: FactSet
CarMax fiscal 2Q24 results. CarMax’s auto finance results offer some insight into a line of business that is significant for many banks reporting later this month. Average managed receivables grew 7.3% LQA and 7.0% Y/Y. The company arrested the decline in net interest margin; at 6.1% the figure was flat Q/Q though down 120bps Y/Y. While the loan loss provision rose 20bps Q/Q as a percentage of receivables, the reserve actually declined by 3bps to 3.08% of receivables, reflecting a tightening of credit standards. On the call, management noted the outperformance of 2017-2020 vintages, with more recent vintages reflecting mean reversion.
Other auto finance news remains incrementally negative. On social media platform X (formerly known as Twitter), “CarDealershipGuy” has been breaking auto finance stories all year, from the pullback of Capital One in floorplan to the more recent exit of BMO. In the past few days he has reported headcount reductions beginning at Ally (beginning with buyout offers to employees on the cusp of retirement age but with more actions to follow depending on uptake), Teachers Federal Credit Union tightening credit standards, and auto dealers beginning to experience strike-related issues with parts delivery (one more wild card for used auto prices).
Figure 5: CarMax Auto Finance results
Source: FactSet
Bear steepener accelerated last week. The bear steepener gained steam last week as the 2-year yield fell 6bps to 5.04% while the 10-year yield rose 14bps to 4.57%. The 2 year - 10 year spread narrowed by 19bps to 47bps. While the lessening inversion is a positive for bank lending spreads, the benefit is exceeded by the effect of rising long rates on AOCI, loan demand, and credit quality.
Figure 6: The bear steepener continues to flatten the curve
Source: FactSet
Figure 7: The 2-10 spread narrowed by 19bps last week to -47bps
Source: FactSet
Fed Funds futures turn slightly more dovish. Fed Funds futures very slightly reversed trend last week, perhaps reflecting concerns about the since-averted Federal government shutdown. The implied first rate cut moved back in, just barely, to the June 12 FOMC meeting.
Figure 8: Fed Funds futures took a slight dovish turn last week
Source: FactSet
Figure 9: Fed Funds Futures imply the first rate cut has moved up to the June 12, 2024, FOMC meeting
Source: FactSet
Weekly Federal Reserve Balances
Federal Reserve borrowings resume climb. Total bank borrowings (BTFP combined with the Discount Window) crept up by another 0.2% last week at $110.9 billion, resuming the slight but steady upward trajectory of recent months. Money market fund balances rose 11bps to $5.6 trillion.
Figure 10: Federal Reserve balances
Source: FactSet
Figure 11: Bank Term Funding Program usage reached another new peak last week
Source: FactSet
Figure 12: Money Market Fund assets rose by 11 bps last week
Source: FactSet
Figure 13: Large cap bank performance and valuation
Source: FactSet
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