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Re: Profit margins for lending institutions
Old 08-18-2006, 11:05 AM   #21
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Re: Profit margins for lending institutions

The type of interest rate environment we are currently in has historically been bad for banks, for the reasons you mention. *

One thing that is helping banks this time around is that they are much more diversified in their income streams. *Most of the banks now get a large portion of their income from fees, rather than just living off the spread. *So while the reduction of their interest spread has been a drag on earnings, it hasn't been dramatic.

Take TCF (ticker TCB), a Minneapolis based bank that I own stock in. *Their earnings per share were down slightly last quarter, but it was pretty minor. *Eventually the spread will get back to normal, and their earnings will start increasing again (knock on wood).

I think the market has been pretty rational in valuing most of the bank stocks I look at. *In fact, I think the sector as a whole should give decent returns over the next 5 years or so. *


Quote:
Originally Posted by Laurence
Caveat, haven't done a lot of research on this but:

A couple years back when rates were at their low, you had to kill yourself to get more than 1% on a savings account, yet 30 year mortgages were still in the 5%+ range.* Now you can get 5% or close to it just about anywhere with your money, yet mortgage rates are just a little over 6%.* Like we all learned in "It's a wonderful life" the bank makes money on the spread, and that spread is shrinking.* Now I know I'm vastly simplifying here, but along with lending institions resorting to more sub-prime lending, anybody else out there short on this industry?* We've beat to death the whole forclosure risk thing here, but even loans that don't go bad aren't the revenue generators they once were, so there is less to absorb the increasing bad loans, right?* Is this tied into the inverting yeild curve Brewer pointed out - i.e. a ramification of?
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Re: Profit margins for lending institutions
Old 08-18-2006, 02:24 PM   #22
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Re: Profit margins for lending institutions

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When interest rates are higher, banks get squeezed. However, they MORE than make up for it, when rates drop.
It's weird watching the mortgage rate decline these last four weeks even though interest rates have been increasing. I guess that is the supply and demand part of the equation.
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Re: Profit margins for lending institutions
Old 08-18-2006, 03:47 PM   #23
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Re: Profit margins for lending institutions

I heard another big money maker for banks like Wells Fargo is FEES.

$1 to check last 10 transactions in your checking acct., at an ATM. $33 for a bounced check or some ungodly amount. etc. etc.

They figured they can make big cash at "nickling and diming". Is that an infinitive profit for checking the last 10 transactions?

Another thing banks don't do, is don't provide you a big sheet of paper for each transaction. You get this little receipt, like the grocery store. They've cut costs. Hire fewer tellers, and make you fill out the deposit/withdrawal slip.

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Re: Profit margins for lending institutions
Old 08-18-2006, 05:05 PM   #24
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Re: Profit margins for lending institutions

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Originally Posted by FinanceDude
I worked at Chase a while back.* Banks don't make 3% on average spread.* Real spread is about 150 bp on average, between credit cards, savings, loans, etc.* Some areas of the bank are higher margin than others.

When interest rates are higher, banks get squeezed.* However, they MORE than make up for it, when rates drop.
I will revise my statement... banks CHARGE a 3% premium.. or should I say want to charge that premium... the PROFIT they make is between 1% to 1.5% on assets...

Right now the bank is paying .2% for MM accounts.... the longer term CD is around 5 to 5.5... the loan rate is in the 8 to 8.5% range.. or higher..
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Re: Profit margins for lending institutions
Old 08-19-2006, 03:33 AM   #25
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Re: Profit margins for lending institutions

remember we are talking gross profit margins....a bank that borrows from you at say 4% and loans it at 6% isnt making 2% profit,they are making 33% profit
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Re: Profit margins for lending institutions
Old 08-19-2006, 06:39 AM   #26
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Re: Profit margins for lending institutions

This is way too complicated for a forum like this.* Banks that are "true banks" (read FDIC insured) have very specific guidelines they must follow.* Your money market and "demand" accounts track short term interest rates which will follow the Federal Reserve Discount Rate that makes the news every month.* Mortgage rates typically follow the 10 year treasury unless you go for one of the sexier loans that won't be put into a banks portfolio and may only be done by specific lenders or investors.

Banks have reserve requirements that allow them to lend more than they have in deposits.* They also have a bias towards "borrowing" short-term (money market deposits) and lending long-term (mortgages).* That's why the interest rate inversion was such a concern a few months ago.

Banks are very profitable.* Like all of us and all companies, they are trying to make more on their assets.* Most "solid" publically traded banks are paying dividends in the 4% range and sell at low PEs.* Their PEs should increase (higher stock prices) when the interest rate situation stabilizes.
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Re: Profit margins for lending institutions
Old 08-19-2006, 07:05 AM   #27
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Re: Profit margins for lending institutions

Remember that Banks (and CU also) can lend out above the reserve which is something like 12% so every CD or Passbook account dollar becomes about $8.50 to them. The simple result is that they lend out about 8.5 times the savings balance. Also banks do construction loans and those rates are a lot above the permanent mortgage rates. Also, as pointed out previously, they "package the loans" and then retain (or sell) the "servicing" of the home and commercial mortgate loans at about 1-1.5% of the balances collected each month. And of course the "fees" they charge from everything they can figure out how to charge for.
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Re: Profit margins for lending institutions
Old 08-19-2006, 10:08 AM   #28
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Re: Profit margins for lending institutions

Both Cute and Fuzzy and Old Army Guy are both wrong... and wrong in a major way...

A bank (one bank) MUST have some kind of deposit to lend money... either through a deposit or buying the money from another bank.. they can not leverage their deposits and lend out MORE than they have... it is impossible

The BANKING SYSTEM is what you are talking about... how it works is you go deposit your $100 in a bank.. the bank has to put a reserve aside (which is low right now)... but say $10.. he then lends the other $90 to someone... that person takes it to HIS bank and deposits it... that bank must put $9 aside as reserves and then can lend out the $81 to someone who takes it to HIS bank...

as you can see... if it is the same bank... the bank has received all the deposits and then has a deposit to offset the loan... NEVER is the bank lending more than is on deposit (or funds bought)..
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Re: Profit margins for lending institutions
Old 08-19-2006, 10:14 AM   #29
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Re: Profit margins for lending institutions

they have a tricky system for counting assets....you take a 100,000 .00 loan...the banks credited with 100,00 in assets,your loan....your not ready to spend the money so you put it in your checking account....the bank is credited with another 100,000 in assets ...they can then figure 200,000 less the reserve requirements as the amount they can loan.....
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Re: Profit margins for lending institutions
Old 08-19-2006, 01:20 PM   #30
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Re: Profit margins for lending institutions

Quote:
Originally Posted by Texas Proud
Both Cute and Fuzzy and Old Army Guy are both wrong... and wrong in a major way...

A bank (one bank)* MUST have some kind of deposit to lend money... either through a deposit or buying the money from another bank..* they can not leverage their deposits and lend out MORE than they have... it is impossible

The BANKING SYSTEM is what you are talking about... how it works is you go deposit your $100 in a bank.. the bank has to put a reserve aside (which is low right now)... but say $10.. he then lends the other $90 to someone... that person takes it to HIS bank and deposits it... that bank must put $9 aside as reserves and then can lend out the $81 to someone who takes it to HIS bank...

as you can see... if it is the same bank... the bank has received all the deposits and then has a deposit to offset the loan... NEVER is the bank lending more than is on deposit (or funds bought)..
Mostly true except for one quibble. Banks have other sources of funds aside from deposits and funds bought. They can do repos, borrow from the Federal Home Loan Bank, or can simply issue bonds to borrow money.

And yes, the banking industry is generally very ptrofitable. I've done very well oening bank stocks, although I am less than enamored of the Behemoths. Better off with the regionals and the better run communit banks, plus they get bought out at a nice premium from time to time.
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Re: Profit margins for lending institutions
Old 08-19-2006, 01:43 PM   #31
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Re: Profit margins for lending institutions

Quote:
Originally Posted by Texas Proud
Both Cute and Fuzzy and Old Army Guy are both wrong... and wrong in a major way...

A bank (one bank)* MUST have some kind of deposit to lend money... either through a deposit or buying the money from another bank..* they can not leverage their deposits and lend out MORE than they have... it is impossible

The BANKING SYSTEM is what you are talking about... how it works is you go deposit your $100 in a bank.. the bank has to put a reserve aside (which is low right now)... but say $10.. he then lends the other $90 to someone... that person takes it to HIS bank and deposits it... that bank must put $9 aside as reserves and then can lend out the $81 to someone who takes it to HIS bank...

as you can see... if it is the same bank... the bank has received all the deposits and then has a deposit to offset the loan... NEVER is the bank lending more than is on deposit (or funds bought)..
You are right by the law and in theory. In practice the money lent is put back in a bank -- not necessarily the same bank. It creates many times the original amount. If everyone went to get their cash out at the same time, the whole system fails. They don't so we multiply the money available by whatever reserve rate the Federal Reserve sets.
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Re: Profit margins for lending institutions
Old 08-19-2006, 01:52 PM   #32
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Re: Profit margins for lending institutions

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Originally Posted by brewer12345
Mostly true except for one quibble. Banks have other sources of funds aside from deposits and funds bought. They can do repos, borrow from the Federal Home Loan Bank, or can simply issue bonds to borrow money.
Well, I will quibble your quibble... repos, borrowing from the FED or issuing bond are 'bought' funds.. but to your point.. it is the whole liability side of the balance sheet that can be used... but no bank that I know of lends on the real estate that they own...

I work for one of the behemouths.. sp?? And it had done well lately.. but back in 2000 when the market went south... it lost over 75% of its value.. and has only gotten back up to 66% of its high.. this is not counting the dividends paid, which are quite nice..
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Re: Profit margins for lending institutions
Old 08-19-2006, 02:00 PM   #33
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Re: Profit margins for lending institutions

Quote:
Originally Posted by Cute & Fuzzy 2B
You are right by the law and in theory. In practice the money lent is put back in a bank -- not necessarily the same bank. It creates many times the original amount. If everyone went to get their cash out at the same time, the whole system fails. They don't so we multiply the money available by whatever reserve rate the Federal Reserve sets.
Correct!!!

But the original post was saying a bank could lend many times its deposit... and that is not correct... if the peson does not put the money back in the bank that lent them the money.. then it can not lend anymore (using the example given)...

The interesting question.. which one is the FIRST deposit that all this come about You think that YOUR cash is real and the other is not There is no way to know which is first and which is second etc..

But to your point on everybody going to get their money out... after thinking about it for awhile... do you mean ALL money from ALL sources, including investments I would doubt that many of us have much money in a real bank... also, the amount of 'cash' that is floating around is a very small percentage of 'money'.. we do most of our transactions using electronic means... I buy stuff with my CC... pay using ACH... get my salary deposited straight into my checking account.. tranfer it to Vanguard using ACH.. so the real cash that I use is very small compared to spending I do..
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