Fitch: U.S. Regional Banks to Build CLO Positions Further
A number of U.S. banks again boosted holdings of collateralized loan obligations (CLOs) in the first quarter, and Fitch expects the trend to continue as banks and other CLO investors look for alternatives to low-yielding Treasurys and MBS.
Stronger leveraged loan and CLO issuance throughout 2012 and into 1Q13 has contributed to the growth in banks’ CLO positions.
The largest trading banks still account for the vast majority of total industry CLO holdings, with JP Morgan having the largest in dollar terms at about $27.3 billion. However, some large regional banks and even some very small institutions are also increasing CLO investments in large part because of the securities’ better yields and floating rate structures. Growing concern over interest rate risk once the Fed begins to exit its quantitative easing program may be steering many banks toward floating-rate CLOs with Libor floors.
However, some large regional banks and even some very small institutions are also increasing CLO investments as net interest margins have been compressed and alternative asset yields remain low. CLOs offer better yields and floating rate structures. Growing concern over interest rate risk once the Fed begins to exit its quantitative easing program may be steering many banks toward floating-rate CLOs.
Fitch believes that new rules introduced by the FDIC for calculating deposit insurance assessments, which went into effect April 1, may also have pulled forward some banks’ CLO investments into the first quarter. This may have elevated reported quarter-end investment totals somewhat.
Quarterly data provided by Highline Financial using regulatory reports indicate that CLO holdings stood at $56.6 billion as of March 31, up 24% from the same period a year ago. Virtually all of these holdings are classified as available-for-sale securities.
Among large regional banks, significant sequential increases in CLOs on the balance sheet were reported by First Republic Bank ($608 million held at March 31) and Union Bank ($2.4 billion in CLOs). For First Republic, these holdings are seen as strategic, adding diversification to its concentration in mortgage-related assets. Some small banks reported that CLOs comprised as much as 25% of their total securities investments as of March 31.
Banks have also stepped up CLO investments since early 2012. Wells Fargo, in particular, has grown its CLO portfolio to $15.3 billion at the end of the first quarter, up 90% from a year earlier. PNC has also grown its CLO book to $2.1 billion in 1Q13 from $323 million in Q1/12.