Simple observation required here. Almost every comment on my post about widening interest margins argued that they were only widening because of guaranteed funding by the Federal Government.
It is simply not true. Look at the numbers and the interest margin was widening sharply until the third quarter of 2008. Indeed interest revenue was a record every single quarter of last year – and that was the case at most banks.
Bank of America did not get any guarantees until that point. You can do the maths on the guarantee and they cannot explain the massive surge in the fourth quarter (too little money, too late). In the Bank of America case most of the guarantees were backstop after they purchased Merrills. They happened this year and hence outside the fourth quarter.
Revenue is rising at pretty well every bank I look at. Doesn’t matter if it is in America or not. It doesn’t matter whether it got a lot of government assistance or not.
Just accept it – for franchise banks – those that have good access to deposits or other sources of funds – revenue for a bank is rising.
It rises faster if the government will lend you wholesale money at government interest rates. But it is rising regardless.
This should not surprise people but there is resistance. In the boom there was no government assistance – and yet interest margins went down and down and down and down.
The banks levered themselves up further and further to get what they deemed acceptable ROEs.
At the moment the reverse is happening. Margins are going up and up and banks can’t de-lever themselves fast enough to survive.
PS. Just to further rub in the numbers - a liquidity trap means people save cash rather than spend. That is the macro problem.
So deposit balances are growing sharply. Bank of America deposits were up from 492 to 583 billion over the past year. I think that is good news for Bank of America. The cost of those deposits on average was down sharply.
Further - the non-interest bearing deposits were up by 25 billion. The bank gets to lend those new deposits at marginal loan rates slightly above their average loan rate of 560bps. One and a half billion dollars of the rise (annualy) is explained just by those numbers. The vast increase in the extra low-rate deposits explains a good proportion of the rest.
If you think that bank revenue is rising simply because of the government guarantees then you are letting ideology get in the way of the numbers. Bank deposits are rising. The cost of those deposits is falling. Banks with good franchises are finding that they don't need to chase to get zero rate deposits.
The opportunties in banking are wonderful - provided you can survive to take advantage of them.