The nation's 500 largest commercial banks increased their holdings of municipal bonds by 2.9% in 1993, according to federal banking reports.
The book value of the banks' portfolios reached $35.68 billion, up by a little more than $1 billion. The gain is only the second since 1985, the year before tax reform eliminated the 80% deduction of purchase and carrying costs that banks could take for holding municipals.
Both in 1985 and last year, smaller commercial banks accounted for most of the growth. The 100 largest commercial banks saw the book value of their municipal portfolios increase by only 1.2%, or $237 million, as of Dec. 31.
The figures, supplied by Sheshun-off Information Services Inc., have been adjusted to reflect mergers and acquisitions done on a pooling-of-interest basis.
Morgan Guaranty Trust Co., which stopped buying municipals after the Tax Reform Act of 1986, still had the largest tax-exempt portfolio among the banks at the end of 1993. The municipal assets of the nation's fourth largest bank had a book value of $2.07 billion.
At its peak in 1986, Morgan Guaranty's portfolio had about $4 billion in municipal assets, said Bob Wei, vice president in charge of the bank's investment portfolio.
Although the bank's holding company has continued to purchase small amounts of municipals, "the bank is steady as the goes and she's going down," Wei said, regarding the bank's municipal investment strategy and bond portfolio.
Second among the banks was State Street Bank & Trust Co., which had $1 billion of municipal assets at the end of last year. State Street, the 27th largest bank, also posted the second largest increase in holdings. Its municipal assets rose by about $633 million, or 140.3%.
Among the banks with the 10 largest municipal holdings, only four ranked among the 10 largest commercial banks.
Hilliard Ebling, a senior vice president of securities trading at State Street, attributed a portion of the increase to sizable purchases for the bank's short-term portfolio. Last year, acting in accordance with its interest rate forecast, State Street was a strong buyer of bank-qualified California notes, Ebling said.
Under the law, banks can receive the 80% deduction only by purchasing bank-qualified bonds, or bonds of issuers that sell $10 million or less a year. These issues are usually snapped up by regional banks, leaving few municipals for the large, money-center banks.
Other investments that contributed to State Street's municipal portfolio growth include the formation of the Clipper Tax-Exempt Trust, a tax-exempt derivatives structure for mutual funds, Ebling said.
Citibank, the largest commercial bank, posted the largest increase in holdings. Citibank's municipal portfolio grew to $702 million from just $45 million -- a hefty 15-fold increase. Officials at Citibank could not be reached for comment.
The nation's 28th largest bank, Bank One Texas, retained its bullish sentiments for municipals, said James C. Monroe, a senior vice president in the treasury division. The bank added $458 million to the $161 million portfolio it had at the end of 1992 -- a 285% increase. Rising interest rates and narrowing yield spreads have been the only developments that tended to curb the bank's appetite, Monroe said.
"We are still as aggressive a buyer, but the market has moved away from us," Monroe said. "We're buying out to 10 years, but we're only aggressive in the first five years. We see definite value in that part of the curve."
Rising rates should keep Bank One from posting strong gains in its municipal portfolio's book value during the first half of 1994, Monroe said.
"Today, we're not able to buy what we could then," because spreads have tightened, the investment officer said.
Comerica Bank-Detroit posted the largest decline among the 500 banks. Municipal assets slipped by slightly more than $162 million, or 29.9%. Comerica was followed by Society National Bank of Cleveland, with a $130.2 million decline, and PNC Bank of Pittburgh, where assets slipped by $115.9 million.
Bank holdings of municipal bonds peaked at about $231.7 billion in 1985, when the book value of the holdings rose by 47%, according to the Federal Reserve's Flow of Funds Accounts. From 1965 through 1982, commercial banks were the largest group of investors in tax-exempt bonds in every year but one, according to the flow of funds report. As of Dec. 31, 1993, the banks were the fifth-largest holder of municipals, the Fed statistics show.
Top 500 Banks' Municipal HoldingsBook Value Top 500 Banks Top 100 Banks Holdings Pct Holdings Pct Date ($ 000s) Chg ($ 000s) ChgDec. 31, 1990 47,852,955 .... 28,770,922 ....Dec. 31, 1991 38,083,378 -20.4% 22,239,011 -22.7%Dec. 31, 1992 34,665,768 -9.0% 19,968,317 -10.2%Dec. 31, 1993 35,683,004 +2.9% 20,204,811 +1.2%Market Value Top 500 Banks Top 100 Banks Holdings Pct Holdings Pct Date ($ 00s) Chg ($ 00s) ChgDec. 31, 1990 49,194,943 .... 29,645,854 ....Dec. 31, 1991 40,203,250 -18,3% 23,571,728 -20.5%Dec. 31, 1992 36,803,664 -8.5% 21,326,854 -9.5%Dec. 31, 1993 37,521,764 +2.0% 21,228,819 -0.5%