SOUTHFIELD, Mich. — First quarter financials are beginning to trickle in from corporates, and some are reporting big gains in net interest income over last year's first quarter numbers.
The $3.9 billion Central Corporate was the first to make the announcement, raking in $3.3 million in net interest income in the first quarter, compared with $1.3 million during the same period last year.
An usually large rate differential is responsible for the bounty, said CEO Bill Walby. CenCorp has a series of investments based on the LIBOR, and since payout on liabilities is based on Fed funds, it's provided an unexpected balance sheet boost.
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"If you look at the history prior to June 30 last year, you'll find the differential had been pretty consistent, about 14 basis points," Walby said. "But since that time, through the end of the first quarter, that differential has ballooned out to 30 basis points, more than double."
Alan Bernstein, Eastern Corporate's senior vice president, business development and strategic planning, said his $2 billion corporate also posted significant net interest income gains, up to $2.45 million compared to $1.74 million during first quarter 2007. Bernstein said the increase boosted EasCorp's total net income to $1.5 million for the first quarter, which Bernstein called a substantial improvement over 2007.
However, he hesitated to give short-term rates all the credit, citing income gains from EasCorp's correspondent services as one example, but said "what has been driving the increased net interest income results at other corporates isn't any different here at EasCorp, we manage our portfolio like most of the others. It's a rising tide that's lifting all the boats."
Why have LIBOR rates been high? Walby said it's no secret, just another symptom of the financial system's general lack of liquidity. Any corporate that invests in vehicles based on LIBOR will have benefited, he said. The first quarter was especially rich, because corporates usually receive a seasonal inflow of deposits from natural person credit unions, as consumers receive year-end bonus checks and tax refunds.
"Credit unions have more liquidity than the rest of the financial system," Walby said. "That's painting the industry with a broad brush, I admit, but I think that statement is accurate. It's certainly true here at CenCorp."
Financial managers scrambling to get in on the action are probably out of luck.
Walby said the differential fell in April and is almost back down to historical averages.
Bernstein agreed the spread is waning.
"I don't want to speak for my investment department, but generally speaking, as time goes by, those kinds of margins will narrow as liquidity re-enters system and markets are normalized."
Still, the gain was a nice change of pace.
"Corporates operate on a very narrow interest margin," Walby said. "Our 2007 net interest margin was 30 basis points, roughly; whereas, a retail financial institution is typically in excess of 300 basis points — roughly a 10 to 1 ratio."
Corporate margins are smaller because the wholesale market operates on volume; and, corporate credit unions typically select high credit quality investments, which offer lower returns, he added.
Walby said he's already returned much of the differential to members. CenCorp raised its MCSD rate to 6.5% when LIBOR rates rose, and is still paying what he calls "the highest MCSD rate in the corporate network or close to it." CenCorp also returned a healthy patronage dividend to members for 2007 year-end, he said.
"As a cooperative, our main concern is the return to members, and we try to operate efficiently, operate on a narrow margin and pay back to members as much as we can, and that's reflective in that rate."
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