If we enter a recession ...and inverting yield.curve do always (7 out of 7 ) end up in a recession The inflation will come down ... At least a bit so that short term yield will go down a bit ... So that Lt yield will catch up and intersect .. We might get into a stagflation like 78 - 82 ... Here the st yield went down but inflation stayed high ... So we end up with another inverting yield curve ... In 81 ... That is an horrific scenario .. it may repeat again ...but I don't think we are facing the same demographic trends than in 1970s baby boomers all wanted houses kids at the same time
Would you have any thoughts about their reliance on the Federal home Loans? That is huge , expensive and increasing. I was a big fan of this bank before the rate rise, but it now looks much more vulnerable that I thought
You pick (or feast) on *htm securities*, and rightfully so, but, HIFS' fixed rate loan books at fair value are essentially the same: interest rate bets gone wrong (of course there are good reasons for such bets, like ALM, but this is not the case for here). Loans at FV result in lower 'real' BVPS.
The *NIM scenarios* are interesting and I tried sth similar, obviously it hinges on a while bunch of assumptions, ie deposit mix, and mostly terms since these come with widely different rates (btw i looked from time to time at their rates and there is not much change, suggesting they did not try to attract deposits for changing terms).
Think the 'fairest' way for future NIM would be to fund all assets with matching maturity today, thus changes in yield curves would not affect today's interest earning/bearing assets/liabilities. This would be very expensive and probably too conservative but provide an interesting view taking out the 'a bet on rates' component.
*A bet on rates* thats what hifs is, esp with these loan structures, ie repricing every 5 years is hugely beneficial when rates fall after a repricing date, and so are floors.
No matter what one thinks abt hifs, it is important to see this. Simply stating they earned x ROEs and compounded bvps at y for z years w/o mentioning interest rate environments is naive. Of course one can argue we call normal interest rate environments or curves normal for a reason, they are the most common state, but maybe it won't be the case...
PS: you, me, and probably everybody else is assuming very low loan losses, so maybe no upside from there (only downside even if unlikely).
PSS: like written (in below) I think it well likely that in a few years I will regret not buying a big stake.
Also selling at like you did at 240$ on March was probably wise . Bad news did not sink in.. the crisis the banknrun etc. also sold some at the same price.in the 401k account no capital gain .. Now that my head is clearer and having done the worst case analysis I am buying back shares at price close to tangible book ... Feel good of owning at 185$... Not much downside
Thanks for the feedback... Yes the NIM estimates is very rough and it depends on the current trend and no drastic change in the deposits mix.. one thing I felt very good is that even if NIm would go to 0.7% hifs would not loose money.. because of it's low operating cost. I dont think the management have done any mistake.. they have a model very focus on conservative loans repriced not often with a very low cost high efficiency model.. your loans are low risk ... You want a low interest come to see me.. event like today is once every 50 years ... And by my calculations they will do fine ... Not loose money ..and during the depression or recession they will do just fine while other banks will do write off etc. And charge off at 2%
Good write up! My only concern is that with high inflation Powell won’t be able to lower interest rates by much if we enter an economic downturn. While buying at book value will no doubt beat the market over the long term the NIM could be under pressure for a longer while than you’ve suggested. Guess we will see.
I touched a bit about this... They want to reenergize the deposits both retail and specialty group... Boston private going down helps in gaining market share in Boston... Will see how it goes.. over the next quarters... Deposits did grow over the last years but not as fast as loans so they became more and more dependant onfed borrowing as you said...
If we enter a recession ...and inverting yield.curve do always (7 out of 7 ) end up in a recession The inflation will come down ... At least a bit so that short term yield will go down a bit ... So that Lt yield will catch up and intersect .. We might get into a stagflation like 78 - 82 ... Here the st yield went down but inflation stayed high ... So we end up with another inverting yield curve ... In 81 ... That is an horrific scenario .. it may repeat again ...but I don't think we are facing the same demographic trends than in 1970s baby boomers all wanted houses kids at the same time
Would you have any thoughts about their reliance on the Federal home Loans? That is huge , expensive and increasing. I was a big fan of this bank before the rate rise, but it now looks much more vulnerable that I thought
Good write up!
You pick (or feast) on *htm securities*, and rightfully so, but, HIFS' fixed rate loan books at fair value are essentially the same: interest rate bets gone wrong (of course there are good reasons for such bets, like ALM, but this is not the case for here). Loans at FV result in lower 'real' BVPS.
The *NIM scenarios* are interesting and I tried sth similar, obviously it hinges on a while bunch of assumptions, ie deposit mix, and mostly terms since these come with widely different rates (btw i looked from time to time at their rates and there is not much change, suggesting they did not try to attract deposits for changing terms).
Think the 'fairest' way for future NIM would be to fund all assets with matching maturity today, thus changes in yield curves would not affect today's interest earning/bearing assets/liabilities. This would be very expensive and probably too conservative but provide an interesting view taking out the 'a bet on rates' component.
*A bet on rates* thats what hifs is, esp with these loan structures, ie repricing every 5 years is hugely beneficial when rates fall after a repricing date, and so are floors.
No matter what one thinks abt hifs, it is important to see this. Simply stating they earned x ROEs and compounded bvps at y for z years w/o mentioning interest rate environments is naive. Of course one can argue we call normal interest rate environments or curves normal for a reason, they are the most common state, but maybe it won't be the case...
PS: you, me, and probably everybody else is assuming very low loan losses, so maybe no upside from there (only downside even if unlikely).
PSS: like written (in below) I think it well likely that in a few years I will regret not buying a big stake.
https://searching4value.wordpress.com/2023/03/23/puking-out-hifs-after-the-nibbling-re-thinking-hifs/
Also selling at like you did at 240$ on March was probably wise . Bad news did not sink in.. the crisis the banknrun etc. also sold some at the same price.in the 401k account no capital gain .. Now that my head is clearer and having done the worst case analysis I am buying back shares at price close to tangible book ... Feel good of owning at 185$... Not much downside
Thanks for the feedback... Yes the NIM estimates is very rough and it depends on the current trend and no drastic change in the deposits mix.. one thing I felt very good is that even if NIm would go to 0.7% hifs would not loose money.. because of it's low operating cost. I dont think the management have done any mistake.. they have a model very focus on conservative loans repriced not often with a very low cost high efficiency model.. your loans are low risk ... You want a low interest come to see me.. event like today is once every 50 years ... And by my calculations they will do fine ... Not loose money ..and during the depression or recession they will do just fine while other banks will do write off etc. And charge off at 2%
Good write up! My only concern is that with high inflation Powell won’t be able to lower interest rates by much if we enter an economic downturn. While buying at book value will no doubt beat the market over the long term the NIM could be under pressure for a longer while than you’ve suggested. Guess we will see.
I touched a bit about this... They want to reenergize the deposits both retail and specialty group... Boston private going down helps in gaining market share in Boston... Will see how it goes.. over the next quarters... Deposits did grow over the last years but not as fast as loans so they became more and more dependant onfed borrowing as you said...