Banks laden with mortgage bonds stand in the middle of the Federal Reserve’s decision to launch a new round of quantitative easing.
Central bank purchases of $40 billion of agency paper a month stand to compress spreads to Treasuries and lift the value of existing holdings, but lower yields would make the instruments a less attractive place to park funds. But while large holding companies have increased their allocations to bonds issued by Fannie Mae, Freddie Mac and Ginnie Mae – by four percentage points of total securities in the year through June 30 among the group considered here – positioning varies widely across individual companies, providing insight into differing strategic orientations. (Use the dropdown in the graphic below to select individual companies and view the composition of their securities holdings. Select “Aggregate” to see securities composition for the group together. Text continues below.)
Securities, which accounted for more than a fifth of total bank assets as of the second quarter, have been taking up more and more space on bank balance sheets in recent years as deposit growth has outstripped loan growth. Direct obligations of Fannie, Freddie and similar organizations and mortgage bonds with federal backing have long been the largest category of securities in bank portfolios, though their overall representation has held roughly steady since before the recession.
Much of the air has escaped from books of other domestic bonds because of the collapse of the private mortgage securitization market, and allocations to Treasuries and foreign debt have grown to fill the gap. Overall, banks hold a relatively small share of direct federal debt; foreign investors, the Federal Reserve and households account for much larger amounts. Banks are the largest investors in agency debt and agency mortgage bonds, however.
In contrast to its unique focus on customers in the technology and venture capital industries, SVB Financial (SIVB) in Santa Clara, Calif., hews closely to the conventional makeup of bank securities portfolios. Agency debt and MBS accounted for 98% of its investment holdings at June 30, roughly the same level that has prevailed since the middle of 2010. Total securities account for a large percentage of SVB Financial’s assets relative to many competitors, reflecting large deposit inflows from its cash-rich clients, though the company has posted strong loan growth.
Among the 26 holding companies considered here (all are publicly traded and have at least $25 billion of assets), Cullen/Frost (CFR) had the largest allocation of municipal bonds as of the second quarter at 26%, though that is down from 40% in early 2010. The San Antonio company’s municipal bond investments have been concentrated in its home state of Texas, and its chief financial officer, Phillip Green, said in July that it might use accumulating liquidity to add to its position in municipal bonds, where it sees “value.”
Citigroup (NYSE: C) had the largest proportion of foreign debt at 22% as of the second quarter, echoing its sprawling international operations. JPMorgan Chase (JPM) had the largest proportion of mortgage bonds without federal backing and other securities at 41%, a profile that mirrored its recent derivatives meltdown. Chief Executive Jamie Dimon has said the mix allowed the company to invest at higher rates while keeping maturities short and defending against the “fat tail” of a spike in interest rates.
Broad forces are at work in determining the composition of bank securities portfolios, including fluctuations in securitization pipelines and maneuvers to meet liquidity standards. But they still convey essential information about banks’ outlooks and business models.