Banks Extend Decade-Long Trend of Positive Portfolio Growth

For the 11th consecutive year, the nation's commercial and savings banks experienced positive growth of their municipal bond portfolios in 2007 - increasing assets by 5.2% to $144.0 billion on a cost basis and by 4.3% to $144.9 billion on a fair-value basis over 2006 figures, according to new data from Highline Financial LLC.

Peter Delahunt, national institutional sales manager at Raymond James & Associates, said that the growth of tender-option bond programs at some banks up until August of last year could have contributed to the growth in holdings.

"There are other portions of the banks that buy away from 'bank-qualified' product, like the TOBs," Delahunt said. "And the TOBs have been liquidating since December, but that wouldn't impede it. Up until August of last year, the TOB programs - the internal hedge funds, if you will - were adding lots and lots of municipal bonds ... so that could show a big growth in bank holdings."

Despite the increase in assets for the 11th straight year, growth slowed to 5.2% on a cost basis and 4.3% on a fair-value basis, which follows two years of much larger increases.

In 2006, assets increased by 10.2% to $136.9 billion on a cost basis and by 10.1% to $138.8 billion on a fair-value basis over 2005 figures, according to the Erlanger, Ky.-based banking information provider. In 2005, portfolios saw a 10.8% increase on a cost basis to $124.2 million, and an 8.9% increase on a fair-value basis to $126.1 million.

Banks saw the largest percentage increase in muni holdings in 1998, when portfolios grew 13.1% to $86.59 billion from $76.53 billion on a cost basis, and 13.3% to $89.46 billion from $78.99 billion on a fair-value basis compared to 1997.

Before this 11-year streak began, bank portfolios endured a brief decline in muni assets. In 1994, they fell 0.8% to $78.05 billion from $78.65 billion on a cost basis, while in 1995, they declined 5.5% to $73.80 billion on a cost basis. There was also a dip in banks' holdings on a fair-value basis during 1994 and 1995, dropping 5.8% to $77.62 billion and 1.8% to $76.25 billion, respectively.

Las Vegas-based Citibank NA failed to continue its string of three straight annual increases to its municipal bond portfolio, declining 22.4% to $11.64 billion as of Dec. 31, 2007, according to the data. However, it remains ranked first in size among 500 of the largest muni portfolios held by U.S. commercial and savings banks, according to Highline.

In 2006, Citibank held $15.0 billion in muni assets - a 16.4% increase from the $12.88 billion in 2005.

Chicago-based LaSalle Bank NA ranked second with its $7.26 billion portfolio, which grew 6.4% from the prior year, when it held $6.82 billion. Third place was held by Cincinnati-based U.S. Bank, which jumped 58.7% to $7.26 billion - posting the largest increase, at $2.66 billion - from $6.82 billion in 2006.

U.S. Bank, which was fourth on the list in 2006, leapfrogged Charlotte, N.C.-based Bank of America, which jumped 10.1% to $6.96 billion, and nearly caught LaSalle for second, falling just $70 million short.

Fifth-place State Street Bank & Trust Co., based in Boston, posted the second largest year-over-year increase in municipal assets in 2007, adding $2.01 billion to its portfolio, bringing it to $5.94 billion.

San Francisco-based Bank of the West also showed a notable increase, jumping 308%, or $1.38 billion, to $1.82 billion, placing them in seventh place.

Lititz, Pa.-based Susquehanna Bank Pennsylvania posted the largest percentage increase, jumping 1,559%, or $234.4 million, to $249.4 million. The increase was enough to springboard Susquehanna into 57th place, after posting just $15.0 million of assets in 2006.

Citibank showed the largest year-over-year loss in muni holdings, dropping $3.36 billion.

Columbus, Ohio-based JPMorgan Chase Bank experienced the largest percentage decline, and the second largest year-over-year dip, with their holdings dropping 86.4% to $52 million from $381 million. However, an increase could be on the horizon in 2008 if the company's proposed acquisition of Bear, Stearns & Co. comes to fruition.

Rounding out the top 10 is Charlotte-based Wachovia Bank in sixth with $3.49 billion; Winston-Salem, N.C.-based Branch Banking & Trust Co. in eighth with $1.42 billion; Sioux Falls, S.D.-based Wells Fargo Bank in ninth with $1.41 billion; and Chicago-based bank Harris in 10th with $1.27 billion.

For reprint and licensing requests for this article, click here.
Buy side
MORE FROM BOND BUYER