Credit Suisse's Pozsar On Year-End Turn Matters (More Detail)

Late NY hours saw Credit Suisse's Zoltan Pozsar note that "two large depository institutions reported their first quarter earnings today - J.P. Morgan Chase and Wells Fargo. J.P. Morgan's balance sheet continued to expand, up by $300bn from the fourth quarter, while Wells Fargo's balance sheet remained flat due to the asset growth ban."

• "~$200bn of J.P. Morgan's asset growth was in reserves at the Fed, but deposit growth - driven by QE4 and stimulus - accounted for only about $130bn of this. The remaining growth in reserves appears to have come from repo borrowings: the bank increased its repo liabilities by about $90bn, which was likely motivated by the bank lending some of its excess HQLA - Treasury securities - to arbitrage collateral shortages and negative repo rates due to increased specials activity during the quarter. Borrowing at negative rates and parking cash at IOR is better than taking deposits at zero to do the same. Repo lending by the bank was down during the quarter, so we are quite certain that the increase in repo liabilities was not driven by matched book activity but by one-sided arbitrage. Do recall the bank's message that the economics of the marginal deposit at this stage points to negative rates, and lending collateral at negative rates to earn IOR is a variation on that negative deposit rate theme."
• "In contrast, Wells Fargo's reserve balances barely grew, and whatever growth there was came from a shrinking loan book. The securities portfolios of both banks were flat during the quarter - they did not add any Treasuries or MBS."
• "Regarding constraints, following the expiry of the SLR exemption of reserves and Treasuries, J.P. Morgan's SLR is currently at 5.5%, only 50 bps above the minimum. The bank did note that it will address SLR constraints through (1) the issuance of preferred stock, (2) turning away deposits selectively, or (3) retaining more common equity (i.e., returning less than $30bn this year)."
• "Thus, relative to our earlier views, it seems that J.P. Morgan won't engage in turning away massive amounts of wholesale deposits, as it seems to prioritize the preferred stock route and possibly even retaining more common equity. Thus, the firepower of the system's lender of next-to-last resort won't shrink too much, if at all. In turn, this means that flexibility around J.P. Morgan's G-SIB score will be key for the bank to engage in arbitrage tactically, on scale."
• "We did not hear anything from management during the earnings call today that would suggest that the bank won't let its G-SIB surcharge climb from 4.0% to 4.5% this year. What's more, management did discuss prominently that it is managing the bank's SCB down to make room for a higher G-SIB score, in-line with our analysis. All this points to a relatively muted year-end turn."