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December 17, 2024 | Premium Service | Whalen Global Advisors LLC (WGA) has published the latest edition of The IRA Bank Book , the quarterly outlook for the US banking industry.  The highlights of the Q4 2024 report include:

December 19, 2024 | Premium Service  | Earlier this year, Wells Fargo analyst Mike Mayo  predicted on CNBC that the price of Citigroup (C) would soar. Citi benefited from the general increase in bank stocks since January and especially the post-election updraft that impacted many banks. Citi even outperformed Bank of America (BAC) , which is one of the more problematic banks in the top seven commercial banks by assets.

January 22, 2025  | Premium Service | Earlier this week, The Charles Schwab Corp (SCHW)  reported earnings and, once again, delivered the goods in term of increased AUM, revenue growth and managing the balance sheet. Yet SCHW remains unforgiven for the hiccup during COVID and continues to trail the thundering herd of large cap financials.

December 23, 2024 | Premium Service  | In this issue of The Institutional Risk Analyst , we ponder how changes in the Fed’s balance sheet set the stage for financials and other industry sectors in 2025.  We also share our portfolio with subscribers to the Premium Service as year-end approaches.

December 30, 2024  | Premium Service  | Over the holiday, the Federal Deposit Insurance Corporation issued a statement by Director Jonathan McKernan  entitled “ Monitoring the Passivity of Index Fund Complexes: Vanguard’s New Passivity Agreement .” The notes to Director McKernan’s statement are essential reading for analysts and investors interested in the activities of the “big three” nonbank asset managers described in a 2022 report by the Senate Banking Committee . McKernan notes in a footnote to his statement:

January 9, 2025  | Premium Service  | With the inauguration of President Donald Trump coming next week and stocks at all-time highs, we want to give our readers some thoughts on market position and asset selection for 2025. Obviously the big risk to the markets in 2025 is political. Morningstar understated the case in polite corporate language:

January 28, 2025  | Premium Service | As Q4 2024 earnings unfold, the story with many financials seems to be driven by the surge in production and market activity in Q3 and into Q4, but the end of the year was largely a swoon. Yet as we prepare to rebalance the WGA Bank Top 100 for Q1 2025, the exemplars are, well, still excellent and the rest of the large bank group continues to give ground from the Trump Trade peaks of early January 2025. The top performing bank stock in the past year was SoFi Technology (SOFI) , a bank holding company that prefers the language of Silicon Valley in its marketing materials and disclosure. We were skeptical of SOFI early on because of the fintech blah-blah and the sky high overhead costs. Banks generally don't focus on EBITDA. Yet SOFI is growing revenue and profitability and somehow is maintaining very low credit losses. For SOFI, the resurgence of popularity represents a rebirth of sorts for a four-year old story. The all-time high for the stock was in 2021 over $25, but in November of that year SOFI got crushed and fell down to $5 per share. It traded in a range below $10 until September 2024, when it went straight up along with many other financials. Unlike many stocks that have benefited since the election of Donald Trump , however, SOFI is delivering fintech style revenue and user growth after a couple of years wandering in the wilderness.  Source: YahooFinance (01/27/25) The Q4 earnings from SOFI were hardly a disappointment, yet the market sold off sharply yesterday, with SOFI closing down just above $16.00. The guidance from SOFI for 2025 is for continued revenue growth ~ 25%, but the better profitability may ultimately be a turn-off for momentum oriented equity managers. Like many names in the fintech space, growing profits and earnings are usually an indication that a stock is exiting the period of maximum price appreciation. The arrival of profitability means that SOFI may be losing that special something that makes equity managers buzz.  Source: Bloomberg (01/28/25) “2024 was SoFi's best year ever," said Anthony Noto , CEO of SoFi Technologies, Inc. "Our ability to deliver durable growth and strong returns throughout the year was once again the direct result of our relentless focus on innovation and brand building. SoFi set new records in revenue, profit, members, and products in 2024, and we look forward to continuing to build momentum on this in 2025." Below we see the cash flow table from SOFI, which is how management likes to look at the business. We find pretax income more useful for banks, but by any measure SOFI is doing well in terms of achieving profitability and also growing engagement with customers. The impairment expense for 2023 is gone and SOFI enjoyed an income tax benefit in this year. Share based expenses were equal to half of GAAP net income. SOFI | 12/31/2024 We like the profitability, but the credit performance of SOFI is the big point of differentiation in our book. The chart below shows net losses for SOFI and other consumer lenders through Q3 2024. Notice that SOFI and Axos Financial (AX) are below the average losses for all of Peer Group 1. Source: FFIEC The bank has only been profitable for about a year and the efficiency ratio fell below 100% earlier this year, but Buy Side managers loved it – at least until yesterday’s earnings release. The chief reason for the attraction is double-digit revenue growth in an industry where such movement usually indicates a problem in gestation. The financial performance of SOFI has been improving as the bank grows, which for most people is a positive. In the world of equity managers, however, being a $40 billion asset bank is not so exciting, even with the Silicon Valley tilt in the disclosure and the focus on EBITDA instead of earnings. The strong growth rates seen at SOFI seem likely to continue, but as the bank grows the rate of change in assets and revenue will likewise slow. Like PayPal (PYPL) and Block Inc. (XYZ) , the story will become relevant instead of highly differentiated. And yes, Block Inc. did change its ticker symbol from "SQ" to "XYZ" on January 21, 2025, one of the stranger examples of corporate branding in consumer finance. The real questions with SOFI remain the same as when the stock first went public in 2021. First, how big is this market niche created by Noto & Co LT? Second, can SOFI maintain its strong credit performance through a real economic downturn? Since the Federal Open Market Committee has not allowed a true economic and credit downturn since 2008, for SOFI, AX and many other high-flying banks the answer to these questions lie ahead.   The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

January 30, 2025  | Premium Service | Last night we took the quarterly snapshot of the US banking industry that results in the WGA Bank Top 100 indices .  The new indices will be live on Monday February 3, 2025 thanks to our index agent Thematic . There were only 104 banks in the WGA test group this quarter vs 106 in Q4 2024, reflecting industry M&A activity. Subscribers to the Annual Service of The Institutional Risk Analyst  have access to the index constituents and weightings. Our next conference call with Annual Service subscribers is later today.

February 7, 2025 | Premium Service | Last week in our quarterly conference call with annual subscribers to the Premium Service , we were asked about several banks that are in the bottom quartile of the WGA Bank Top 100  indices. Below we go through several of the bottom 29 banks in the test group to see if there are any members of the purgatorio  for large banks which may be redeemed.

March 6, 2025  | Premium Service | In this issue of The Institutional Risk Analyst , we provide our subscribers with some contrarian thoughts about the US economy in 2025 and the pro-business environment being created by President Donald Trump . We also update readers on some of the more interesting movers in mortgage finance, banking and credit during 2024 as Q1 2025 draws to a close. Is it time to sell credit managers?

February 20, 2025  | Premium Service  | In this edition of The Institutional Risk Analyst , we take an initial look at asset allocation in the Trumpian Age. As with his historical analog, President Andrew Jackson  (1828-1836), President Donald Trump  is a disruptor of all around him, often for the good. Yet the mere fact of change in many sectors of the US economy will create both problems and equally impressive opportunities.  What are some of the market sectors that will be most disrupted by the Trumpian Wave of 2025? As we have been describing over the past several years (“ Biden Administration Staggers Toward a Debt Default ”), President Trump is requiring all federal agencies to "report up" to the White House. This week the Trump Administration published a new executive order that replaces and expands on Executive Order 12866. The new EO, " Ensuring Accountability for All Agencies ," greatly expands the reach of the White House, OMB and GSA in the activities of the independent agencies. In short, the independent agencies are no longer independent of the Executive Branch. Federal Reserve Chairman Jerome Powell now reports up to National Economic Council head Kevin Hassett and Treasury Secretary Scott Bessent . Given this latest development from the White House, we think that businesses should recalibrate expectations for the level of friction from federal regulators when it comes to business plans going forward. As we get clarity on new Fed, Federal Housing Administration and Ginnie Mae leadership, we think there will be opportunities to push back or eliminate areas of friction such as Basel III, risk-based capital rules at GNMA, the use of two credit scores and bi-merge in conventional lending, and a punitive view of prepayments at the FHA. Likewise, the Consumer Financial Protection Agency has been lobotomized and will operate solely to undo years of excessive consumer regulations. We are in the age of magical thinking in Washington. Anything is possible if the financial services industry can but just manage to ask. But what does this mean for investors? It means massive disruption in key markets like multifamily real estate and Treasury debt. Hello. Multifamily Real Estate The cuts announced by the Trump Administration at HUD this week were reported to be primarily focused on personnel engaged in financing for multifamily housing. The total dollar amount of HUD multi-family loan guarantee commitment authority is currently set at $400 billion. The GSEs each have a cap of $100 billion annually for new multifamily loans, but have far larger portfolios. Together with the GSEs, HUD provides significant support to the multifamily sector and at far higher loan-to-value rates than are available from private lenders. Conservatives have long wanted to force the GSEs and HUD out of financing for multifamily, which will result in some serious credit problems in red and blue cities around the country.  You could almost -- almost -- argue that the banks and private developers want to create a crisis in urban multifamily to generate some restructuring opportunities. The only trouble with this predator thesis, however, is that many of the assets financed by HUD and the GSEs are smaller properties that cannot be financed privately. Outside of federally-supported lending, small multifamily is a hard money, cash market, which further compresses valuations. The charts below come from the most recent earnings presentation for Freddie Mac and Fannie Mae.  Freddie Mac (12/31/2024) Fannie Mae (12/31/2024) A reduction or withdrawal of HUD/GSE cover for multifamily assets is going to create a big mess, both for investors and banks alike. Residents in these assets will likely be facing significant problems longer term. Bank multifamily is about $600 billion in unpaid principal balance (UPB), while non-bank multifamily loans – including the GSEs – is another $1.6 trillion in UPB, for a grand total of $2.12 trillion (MBA). As you can see in the chart below, the GSEs are about half of the total market in multifamily.  Source: MBA, FDIC, FHFA Then, when the Trump FDIC gets around to disposing of the rest of the rent stabilized assets from the estate of Signature Bank, the market for low end rent-stabilized multifamily assets could be even more adversely impacted. Once FDIC appoints a new head of resolutions and recoveries, and seats a new board, the sale of the Signature Bank assets is at the top of the agenda. Again, the financing market for rent-stabilized properties in New York is very limited. Now conservatives in Washington may think that reducing federal support for multifamily housing is a great idea, but the reduction in credit support for these assets will create some very serious political problems over the medium term. As the GSEs withdraw from these low-income markets, for example, many of these assets will find it difficult to secure new financing and will go into default. Blue state governors like Kathy Hochul in New York will face some very big political and financial problems. And maybe that is the intention. But any hope of releasing the GSEs from conservatorship also will be hurt because of the reduction in profitable revenue for Fannie Mae and Freddie Mac. In addition to forcing the GSEs out of multifamily lending, conservatives around the Trump Administration want to force the GSEs out of financing second homes and second lien mortgages -- two very profitable areas for the GSEs. Treasury Debt During his Senate confirmation hearing, Treasury Secretary Bessent said that he wanted to increase the amount of long-term debt issued by the Treasury. As we’ve noted in previous comments, under the Biden Administration the Treasury focused most of its issuance on short-duration T-bills to keep the deficit from growing too rapidly, but the Fed’s rate hikes since 2021 have largely thwarted this effort. Now Bessent is singing a different tune , namely that any move to boost the share of longer-term Treasuries in government debt issuance is some ways off, given current hurdles that include the Federal Reserve’s quantitative tightening program, where the central bank is effectively selling Treasury exposure into the markets. “That’s a long way off,” Bessent said in an interview with Bloomberg Television’s Bloomberg Surveillance on Thursday, when asked about terming out Treasuries sales. Why is this important? The trade policies and tariffs threatened by the Trump Administration are adding uncertainty to the credit markets, which in turn is hurting demand for Treasury debt. Likewise, gold is paring recent gains after Bessent said that revaluing the US’s reserves of the metal were “not what he had in mind” when he discussed monetizing the assets on the US’s balance sheet. As President Trump has turned up the rhetoric and also the reality regarding tariffs, this change in US policy has encouraged many nations to look at diversifying reserve assets away from the dollar. "Japan has seen the largest drop in its Treasury holdings since 2022, only beaten by China as it strives to diversify away from the dollar," notes Simon White of Bloomberg . "Regardless of the reason, the biggest customer for US savings is currently taking a back seat." White notes that global investors are holding less US debt. Even though purchases by the rest of the world as a whole (as of the latest data in 3Q24) have picked up in dollar terms, foreigners now hold less than a third of US public debt, down from 50% a decade ago. Even as yields on US debt have risen, buyers have reduced purchases because of unrealized losses related to higher interest rates. The same market risk that has driven huge mark-to-market losses for US banks as interest rates have risen is also hurting key foreign buyers of Treasury debt. Norinchukin Bank widened its loss forecast to ¥1.9 trillion and named a new chief executive officer as the Japanese lender tries to recover from its foreign bond investment debacle. Other large buyers of Treasury debt around the world face similar challenges. Many of the policy changes being put in place by the Trump Administration have both immediate and long-term implications that have yet to be fully assessed by the financial markets. With Treasury primary dealer inventories at high levels, the Street is long risk and facing a softening market for Treasury debt. As the Trump Administration accelerates its attack on the Administrative State, it will be interesting to see how the dollar performs vs gold. In particular, if the dollar starts to lose ground vs other currencies, then we may see upward pressure on US interest rates as foreign buyers curtail new purchases. It's as though Donald Trump has wound the economic clock back 50 years to President Richard Nixon and the early 1970s, when the US shut the gold window for foreign central banks. Stay tuned. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

January 16, 2025  | Premium Service | In this issue of The Institution Risk Analyst , we look at the good and the bad in Q4 2024 bank earnings from two of the largest US banks. But first we wanted to share an observation about the prospect of releasing the GSEs, Fannie Mae and Freddie Mac, from conservatorship.  Earlier this week, Mark Zandi of Moody’s Analytics and Jim Parrott of Urban Institute, nicely laid out the case against releasing the GSEs without new legislation (“ Fannie and Freddie’s Implicit Guarantee: Another Iceberg on the Path to Privatization ”). The key paragraph in the piece is below: “ In its recent note on how it would rate the GSEs if released from conservatorship, Fitch discusses the impact of the level of government support assumed. It states that it would likely continue to align the GSEs’ rating with that of the government, but partly because Fitch assumes the GSEs would retain a 'dominant market presence.' We take this to mean that Fitch is assuming that the government would remain committed to bailing out the GSEs if they failed—that they have an implicit guarantee. We believe that other ratings agencies would also continue to align the ratings of the GSEs with that of the government if they assumed an implicit guarantee. But we believe that they would downgrade the GSEs meaningfully if convinced that they were being released without the implicit guarantee.” Our next conference call for Annual Premium Service Subscribers is 01/30/2025 In simple terms, if and when the GSEs exit conservatorship w/o legislation from Congress, the conventional secondary loan market is basically kaput. Loans guaranteed by Fannie Mae and Freddie Mac will no longer be “risk free” assets, which means that the options for financing conventional loans will dwindle. For example, conventional loans will no longer be “eligible for pooling” for the purposes of term REPO and bank warehouse lines. Conventional loans will no longer be eligible for the to-be-announced (TBA) market and they will effectively become private label loans. Hedging interest rate risk related to conventional loans will become more costly and, in many cases, problematic outside of bank warehouse financing. Sound like a disaster? Yup. The conventional market will divided into a bank market for larger, above average (~$400k) loans and below-average loans, which will migrate back to FHA/VA/USDA and Ginnie Mae.  In a release "as is" scenario, i t is easy to see secondary market spreads rising at least 1% in the event, meaning that the cost to consumers for a conventional loan will rise by at least that amount. A senior member of the ratings community summed things up after reading the Zandi/Parrott analysis: “I thought they would have come out even stronger re: MBS. MBS have to be viewed as risk free otherwise exit from conservatorship does not work in all markets, not just stressed markets.” The same well-placed observer notes that an equity raise for the Treasury upon release is a really bad idea and, in fact, will be really hard to achieve w/o weakening the credit standing of the GSEs. As we’ve noted and he adds, we don’t know what the profitability of Fannie and Freddie will be as we do not know where MBS and unsecured debt will trade post-release. We continue to believe that the odds of actual release from conservatorship for the GSEs remains 1:5 or less. The reason is very simple. Most investors in conventional MBS cannot conceive of a world in which the bonds are not risk free assets. It does not compute. Once a large enough crowd of people comes to appreciate the realities of releasing the GSEs "as is," the proposal will become politically toxic and the various trades and financial institutions will oppose it. If we actually convince a large number of global bond investors that President Donald Trump is reckless enough to crater the $7 trillion conventional loan market to he can force another tax cut through Congress in 2025, then the selloff in MBS and also Fannie and Freddie unsecured exposures will be massive. The collapse of the conventional loan market may even lead to a larger selloff in the US markets. There, we said it. What Do BAC and JPM Say About Bank Earnings ? In the Q4 2024 earnings supplement for Bank of America (BAC) , if you turn to Page 9, “Quarterly Average Balances and Interest Rates,” you may peruse the asset returns and funding costs in the table. Then look at the bottom of the table and notice that the net interest spread was unchanged YOY. This summarizes the position of the US banking industry as 2024 ended with average asset returns still below 1%. But for the strong results in terms of equity and debt capital markets, BAC and most other banks would have reported down quarters. The one exception is JPMorgan (JPM) , which increased earnings and asset returns in Q4 2024 and the full year. JPM pushed asset returns up to 1.35% while maintaining operating efficiency at 53%, yet the bank noted compression in deposit margins. JPM does not disclose net interest margin in its earnings materials. JPMorgan | Q4 2024 BAC managed to reduce the rate paid on deposits below 2% and grew topline revenue 15% YOY. This all looks great from a distance, but BAC still only managed to deliver 0.8% return on assets or well-below the average of ~ 0.9% for Peer Group 1 in Q4. Interest income rose 12.3% YOY, but interest expense rose 23% or almost twice as fast. Likewise, JPM saw interest income rise 14% but interest expense rose 25%. NIM at BAC was down slightly vs 2023 and funding costs overall rose significantly, as shown in the table below. Bank of America | Q4 2024 If we review the income statement for BAC, commissions and profits from capital markets figure prominently. Again, if we back out these extraordinary items from earnings, BAC would have reported a down quarter due to higher funding costs and operating expenses. The source of these gains was interest rate volatility in the second half of 2024, a market environment that may not be repeated in 2025. The summary income statement for BAC from the Q4 2024 supplement is below. Bank of America | Q4 2024 As you can see, if we back out the big increase in fees and commissions and market making activities, BAC would have reported down earnings due to flat NIM and rising funding costs and SG&A. Notice also that other income (loss) was $3.4 billion, which in Q3 included " certain negative valuation adjustments, partially offset by lower losses on sales of available-for-sale debt securities." Most banks which have reported so far have featured a build in terms of loan loss reserves, adding further evidence that 2025 could be the year when credit becomes a key factor in bank earnings. But p erhaps the biggest surprise from BAC and other large banks that have reported so far this week is the modest growth in deposits. Both JPM and BAC had negative deposit growth in Q4, suggesting that these banks are choosing to run off assets given the rising cost of funds. Deposit runoff at JPM and BAC suggests that loan growth could likewise be flat or even negative across the industry in 2025. Unless the FOMC relents and begins to again increase the size of the central bank's balance sheet, we may see shrinkage in bank deposits in Q1 2025, a scenario that few analysts are anticipating. May 2025 The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.