Thursday, September 14, 2023

The banking sector is one of the biggest, most important industries to financial analysts, but it’s also one of the most challenging industries to analyze skillfully. For example, the financial disclosures that banks make can often look quite different from those of other sectors, as can the key metrics that analysts should follow.

To help us understand those challenges, and what an analyst might consider when studying banks’ financial disclosures, we decided to go to an expert: John Helfst, an analyst at 1919 Investment Counsel who follows the banking sector closely, and who also happens to be a member of the Financial Accounting Standards Board’s investor advisory committee. We called him up, asked him some questions about issues in the banking sector these days, and turned the whole conversation into a podcast.

You can hear our entire podcast conversation by using this link. Meanwhile, for those who prefer the written word, we also jotted down some of Helfst’s observations for a series of blog posts. Our first post is below.

Deposit Disclosures

We began by asking Helfst what disclosures he follows for the banking sector. He drew a distinction between disclosures that have always been important, and disclosures that have become more important since the collapse of Silicon Valley Bank back in March of this year. 

Traditionally, Helfst said, you want to look at disclosures that help you understand the mix of a bank’s deposits, since that will help you understand the probable future costs of servicing those deposits. 

For example, Helfst said, you want to study the percentage of non-interest bearing deposits, retail deposits, corporate deposits, and municipal deposits. You also want to understand the mix of “timed deposits” (that is, certificates of deposits) versus demand deposits, which are deposits sitting in a regular savings account. Finally, you want to understand the spread between deposit interest rates and the Federal Reserve funds rate, since a wide spread suggests that the bank’s deposit rates (which will affect interest expense) will soon change. 

OK, let’s pause right there. If that’s the sort of data an analyst wants, where can Calcbench users find it? 

One place to start would be the deposits footnote that just about all banks include in their quarterly filings. For example, we wrote a quick review of Citigroup’s ($C) deposit footnote in March. Figure 1, below, shows a quick sample.

As you can see, it includes a breakdown of interest bearing and non-interest bearing deposits. Further down in the footnote, Citigroup also discloses timed deposits, the maturity dates of those deposits, and the portion of timed deposits that exceed the federal insurance limit of $250,000.

The deposits footnote does not include data about the interest rates paid on savings accounts, although analysts can often find that information elsewhere in the 10-K or from sources other than SEC filings. 

Loan Disclosures

OK, back to Helfst. In addition to disclosures about deposits, he also pays close attention to disclosures about loans. Specifically, he wants to know which loans have floating interest rates, versus those that carry a fixed rate. He also looks for what’s known as the “gap table” that banks typically report somewhere in their 10-K. 

A gap table is any presentation of information about a bank’s interest rate exposure. It’s not a fixed-format thing, where you can search “gap table” and always find such information. Sometimes you will find a bank disclosing this information and calling it a gap table; other times you’ll need to scan through the Management Discussion & Analysis to find the information, and it might go under any number of names. 

Valley National Bank ($VLY) is a great example because it offers two gap tables in quick success in its MD&A. The first presents maturity dates for its various types of loans; the second provides a breakdown of fixed-rate versus floating-rate loans, again by loan type. See Figure 2, below.

From there, an analyst could get a much better sense of which loans might roll over into much higher (or lower, for that theoretical day when the Fed cuts rates again) interest rates, and how that change might affect the bank’s interest income, interest expense, and net interest income.

After the SVB Collapse

All those disclosures are still valuable for the banking industry today, but the collapse of Silicon Valley Bank did force analysts to pay attention to many more issues. “We were looking at stats that analysts had never considered before,” Helfst said. 

So what disclosures would be useful in that new world? Helfst had a few ideas.

Foremost, he said, analysts should look at the percentage of total deposits that exceed the federal deposit insurance limit of $250,000 per account. They might also study disclosures about the bank’s securities holding, such as the mix of held-to-market (HTM) versus available-for-sale (AFS) securities and what the yield is for each of those categories. For example, in his research Helfst found that over the last three years, large banks had shifted their mix from 70 percent AFS to 70 percent HTM, mostly to protect the Tier 1 capital that the banks had to keep on the balance sheet. Smaller banks, which aren’t subject to the same capital reserve requirements, didn’t do that. 

As it happens, Calcbench can help you find that sort of data, too. Just the other week we had a post looking at PacWest Bancorp ($PACW) that traced the flow of its AFS and HTM securities, which PacWest neatly organized into commercial mortgage-backed securities, residential securities, and other asset classes. It also reported the maturity dates for those HTM holdings, and even the credit quality. 

We’ve also had numerous posts this year looking at bank deposit disclosures, and yes, many banks do disclose both insured and uninsured deposit levels. 

In other words, the information you need for solid analysis of the banking sector is generally in the 10-K or 10-Q somewhere. You just need to know what you want to find, and a tool to help you find it. Calcbench is happy to be the latter. 

We’ll have more of Helfst’s banking observations in coming days. 

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