US Banks Underweight
Analyst(s): Andrew Marquardt Andrew.Marquardt@fpk.com 212-857-6137
Macro Trends Monthly (Feb): Mixed Bag But Net Negative Fundamentals
• This report looks at macro banking indicators, which provide a quantitative snapshot of trends so far in 1Q09.
• Overall, macro data indicates continued fundamental pressure for the industry with positives of better
pricing on assets, lower funding costs, and less unrealized sec losses likely more than offset by still rising credit
costs (number of corporate bankruptcies rising, rising unemployment, and real estate trends still showing
pressure) and still poor capital markets trends. Mortgage applications are rising, but we suspect low pull
through rates. That said, we expect mortgage banking revenue will improve moderately in 1Q. FX volatility
remaining high will be helpful to the Trust Banks.
• Implications (Commercial Banks)—while consensus has come down meaningfully, still a downward
bias as rising credit costs more than offset better pricing dynamics and potential NIM expansion. Slowing
commercial loan growth is notable as this confirms widespread economic weakness, in our view. Funding costs
have improved but credit remains key issue for the sector, which remains under pressure on both consumer
and commercial. Unrealized sec loss improvement important with heightened focus on TCE levels but sec
valuations remain a wild card and additional write-downs are still more likely than not near term. Specifically we
are most concerned with the potential for additional OTTI on non-agency MBS and Trust Preferreds
• Implications (Trust Banks)—1Q consensus could move higher, given FX volatility remains very elevated in
1Q (although down sequentially) and likely still flight to safety causing bigger than usual balance sheets
mitigated somewhat by lower capital markets activity and market levels negatively impacting assets under care
and certain fee businesses.
Specific takeaways below and additional detail in main body of note:
• Total loans are down 5% LQA and flat YoY so far in 1Q. Commercial loans are down 6% LQA (vs +10% in
4Q), and are up 4% YoY (vs 8% in 4Q). Consumer loans are up 3% LQA (vs 1% in 4Q), and down 3% YoY (in
line with last qtr). See Fig 2.
• Core deposits are up 13% LQA (vs 22% in 4Q) and up 11% YoY (vs 8% in 4Q). Non-core deposits are down
9% (vs +30% in 4Q) and up 3% YoY (vs 8% in 4Q). Deposit level remain outsized likely due to dramatic growth
in deposits for banks with custody businesses as servicing customers move to cash. See Fig 4.
• An upward slope on the yield curve remains and absolute treasury rates have declined slightly vs 4Q08.
See Figs 14-17.
• Credit spreads for both investment and non-investment grade bonds have narrowed in recent weeks,
but on average are still well above 4Q08 levels and more than double its five-year averages. See Figs 18-20.
• Funding costs improved as both short-term FHLB borrowings and deposits costs have declined following Fed
cuts (although S-T rates are largely unchanged). LIBOR costs have declined on an absolute basis and have
stabilized, but the 3-month LIBOR/Fed Feds spread remains elevated. See Figs 22-27.
• Mortgage applications are up significantly in the quarter driven by refinancing activity See Figs 12-13.
• Market trends generally poor with lower market values, weak capital markets, equity outflows and
sequentially lower equity trading volumes. FX volatility has declined vs 4Q08 but still remains very elevated vs
historical levels. See Fig 34-40.
• Real estate market trends show continued pressure despite declining inventories as asking price declines
accelerated last month. See Figs 42-44.
• Credit quality negative. There have been 49 corporate bankruptcy filings about half way into 1Q (vs 87 in 4Q).
Initial Jobless claims and personal bankruptcies filings continue to accelerate. See Figs 25-31.
• Unrealized securities losses improved thus far, but remains a wild card due to expanded TALF program,
narrower credit spreads in general, but also still weak underlying asset quality and pending legislation could
result in further permanent impairment near term. See Fig 45.
• Consensus estimates continue to be revised down, but we think there is more to go. See Figs 46-48.

MACRO BANKING TRENDS
We summarize select macro trends for: 1) industry balance sheet; 2) mortgage
banking; 3) interest rates; 4) credit spreads; 5) asset quality; 6) capital markets
trends; 7) real estate market; 8) unrealized securities gains/losses; and 9) consensus
estimate revisions.
Industry Balance Sheet
Using the Fed’s H8 data, we track balance sheet trends for the banking sector. We
use domestically chartered commercial banks (not seasonally adjusted) figures,
which we believe best represents our coverage universe or roughly the largest 50
U.S. banks. Below we summarize how 1Q09 trends are shaping up (data as of
2/10/09).
Bank balance sheets remain outsized but have declined on a sequential basis.
We believe the dramatic sequential growth experienced in 4Q08 was attributable to
the balance sheets of banks with custody businesses (primarily BK and STT, but also
the servicing lines of JPM and C) due to a flight to quality from servicing clients (which
are holding higher levels of cash deposits) and participation in government programs
including the ABCP Money Market Liquidity Facility (AMLF), which provides liquidity
to money market mutual funds through Fed-funded purchases of commercial paper.
While total assets have declined 2% LQA, we believe balance sheets will remain
outsized until government programs end and/or markets stabilize.
Earning assets down 6% in 1Q on a linked quarter annualized (LQA) basis (vs up
15% in 4Q). Year-over-year (YoY), earning assets are up 2% (vs +6% last quarter).
Total deposits are up 9% annualized so far in 1Q (vs +24% last qtr). YoY deposit
growth is at 9% (vs 8% last quarter). Borrowings are down 32% LQA and down 2%
YoY, and have to declined to roughly 21% of total funding.