July 18, 2024 | Premium Service | Last month, we published a comment asking whether credit-risk transfer (CRT) transactions would help depositories manage various types of risk (“Will Credit Risk Transfer Save the Banks? Are MSRs Overvalued?”).
In Q2 2024 earnings, we are seeing a number of banks make use of synthetic CRT to reduce unrealized losses and reposition balance sheets for higher returns. And just by coincidence, many of these banks are in the top quartile of the WGA Bank Top 100 Index.
“Under US banking rules,” Mayer Brown notes in October 2023 note, “there are effectively two types of securitizations recognized under the regulatory capital requirements: (i) traditional securitizations, which require the underlying assets to be held off balance sheet, and (ii) synthetic securitizations, which require a portion of the credit risk of the underlying assets to be transferred using one or more credit derivatives or guarantees (i.e., synthetically).”
While a number of smaller banks have made use of synthetic CRT transactions, most larger banks have not. JPMorgan (JPM), for example, reportedly has done two CRT transactions so far, one residential the other commercial, but the other large banks have not followed suit. A number of banks such as Bank of America (BAC) seem content to wait for lower interest rates, even though rates may not fall enough in the next 12-24 months to offset the impact of low-yielding securities on future earnings.
Source: Google Finance
One bank that has aggressively attacked the problem of COVID-era securities is Pinnacle Financial Partners (PNFP), a $50 billion asset bank located in the rapidly growing Nashville-Murfreesboro-Franklin MSA of Tennessee. Indeed, the one-year total return on PFNP is over 45%.
