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Seeking Alpha: Update?

By: Jeff Goble

In the past, we have discussed how managing a bank’s bond portfolio is similar to managing a bond fund. Because I have received several requests for this information and we are already halfway through 2013, let’s see how bank bond portfolios are currently performing using the language and performance metrics often used in bond funds.

Alpha is usually defined as the performance advantage a fund achieves over its peer funds or a benchmark. We can use this same process to compare your portfolio to the UMB Peer Group, which contains roughly 600 banks, the majority of which are located in the Midwest. Comparing portfolios to both the current yield as well as the total return is recommended because total return factors in the gain or loss in market value creates an apples-to-apples comparison for diverse portfolios.

Click here for a table that measures seven metrics for three groups of banks in the peer group (the top 10 percent, the average and the bottom 10 percent by total return). There is a space where you can fill in your portfolio’s numbers for comparison purposes.

Many of you may be interested in how the Top 10 percent are currently creating an amazing 1.76 percent of Alpha (4.30 percent–2.54 percent) and whether these strategies would be appropriate for your bank. It looks to me that the Top 10 percent have added a lot of average life (7.76 years) and a substantial amount of duration (4.34 years), and this is powering their performances in the low rate environment we have been facing the past several years.

In evaluating the security mix, it was not surprising to find that they hold 68 percent in municipal bonds with an average maturity of 9.47 years. Most municipal bonds with maturities longer than 10 years also possess a call feature, which explains the shorter duration, as some of these long-term issues might be called early. These banks obviously bought very long, tax-free municipals at just the right time and are now riding that income wave. However, if the Fed starts tapering its quantitative easing programs, banks with long average maturities could face a significant change in their gain/loss positions and hence, their total returns.

As we have discussed many times over the years, the best portfolio for your bank is always the one that aligns with your stockholders’ philosophies and goals as well as balances your loan to deposit (or loan to funding) totals and overall interest rate risk position.

The most important requirement in my opinion, however, is that you sleep well at night.

Jeff Goble is executive vice president and managing director, investment banking, at UMB Bank, n.a., Kansas City. His email address is Jeffrey.Goble(at)umb.com.

Copyright (c) July 2013 by BankNews Media


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