Kroll Bond Rating Agency (KBRA) releases this month’s edition of The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show.
This month’s newsletter, Bank Treasurers Sort of (Kind of) Ring in the New Year, reviews some of the key broad takeaways from Q4 2020 earnings reports, noting their optimistic outlook, but cautious tone, for performance in 2021. Discussing how bank treasurers have been reluctant to replenish run-off in their bond portfolios because of historically low replacement yields, the newsletter also notes the positive effect of low rates on the mix and cost of their balance sheet’s funding side, as noninterest-bearing deposits reached a record 25% of total deposits.
The newsletter also weighs prospects for capital market businesses in 2021, which are under pressure to repeat their 2020 performance, a banner year for trading and corporate finance, against optimistic expectations expressed by management. While there were three marquee bank M&A transactions announced in Q4 2020, bank managers expect the pace of M&A to only pick up in the second half of 2021. Meanwhile, equity and fixed income markets remain well bid, barreling ahead despite a COVID resurgence, political uncertainty, a major government computer hack, and an uncertain future for addition fiscal stimulus.
The Bank Treasury Chart Deck reviews the financial landscape that bank treasurers face in 2021, with slides highlighting recent moves in the 10-year Treasury, inflation projections, equity indices, gold, cryptocurrencies, and oil. While bank stocks have rallied and consolidated their recent gains in the equity markets, the last slides in the deck profile the considerable headwinds the industry faces to grow earnings, with a growing pile of excess deposits and the narrowest net interest margins in 36 years. These headwinds will likely help accelerate the bank consolidation trend shown in the last slide in this month’s deck.
This month’s edition of Bank Talk: The After-Show looks at the differences between International Financial Reporting Standard (IFRS) 9 and Current Expected Credit Loss (CECL), comparing the reserve levels in aggregate for the five largest Canadian banks and six of the largest U.S. banks through 2020. Van Hesser and Ethan Heisler discuss how the bucket approach method used by the Canadian banks following IFRS 9 let them avoid building the significantly higher credit reserves built by U.S. banks following CECL. In contrast, U.S. banks finished building their reserves by the end of Q2 2020 assuming life of loan losses, then reduced their provisions in Q3 2020 by 83%, and then even released a modest amount of reserves in Q4 2020. Conversely, Canadian banks reduced their reserves from Q3 2020 to Q4 2020 by 26% and remain at risk of higher provisioning should their pass-rated loans deteriorate in 2021.
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About KBRA and KBRA Europe
KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA. Kroll Bond Rating Agency Europe Limited is located at 6-8 College Green, Dublin 2, Ireland.
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