Charles Schwab, Goldman Sachs, and Northern Trust released 4th quarter earnings this week, and all of the reports show a drop in money market fund fee waivers. (For more on decreasing fee waivers, see also yesterday's "News," "Ignites: MMF Fee Waivers Drop in 2015; Fitch on MMF Reform in China.") Schwab's Q4 earnings, released Jan 19, shows $153 million in money market fund fee waivers in Q4, down from $193 million in Q4 of 2014. In 2015, Schwab waived $672 million in MMF fees, down from $751 million in 2014. Schwab CFO Joe Martinetto also commented, "This past year, we completed approximately $6.5 billion in bulk transfers from money market funds to Schwab Bank, including $2.8 billion in the fourth quarter." We look at these earnings releases below, and we also excerpt from J.P. Morgan Securities' most recent Prime Holdings update. Finally, welcome to those of you attending Crane's Money Fund University, our "basic training" event, which takes place today and tomorrow at the Hyatt Regency Boston. We look forward to 2 days packed full of money fund education and information!
Northern Trust released its Q4 earnings on Jan. 20. The release says, "Trust, investment and other servicing fees were $747.1 million, up $18.9 million, or 3%, from $728.2 million in the prior-year quarter. The increase primarily reflects new business and lower money market mutual fund fee waivers, partially offset by the unfavorable impact of movements in foreign exchange rates and equity markets." It adds, "Investment management fees increased 10%, primarily due to lower money market mutual fund fee waivers. Money market mutual fund fee waivers in C&IS totaled $7.8 million in the current quarter compared to $16.8 million in the prior-year quarter."
Furthermore, Northern says, "The increase in Wealth Management fees was primarily driven by new business and reduced money market mutual fund fee waivers, offset by unfavorable equity markets. Money market mutual fund fee waivers in Wealth Management totaled $12.7 million in the current quarter compared to $16.2 million in the prior-year quarter." Finally, they add, "Net interest income on an FTE basis totaled $296.0 million, up $21.0 million, or 8%, from $275.0 million in the prior quarter. Earning assets averaged $105.6 billion, up $4.8 billion, or 5%, from $100.8 billion in the prior quarter. The increase was primarily the result of higher levels of money market assets, reflecting increased demand deposits and short-term borrowings."
Goldman Sachs also put out Q4 earnings yesterday. Their release explains, "Net revenues in Investment Management were $1.55 billion for the fourth quarter of 2015, essentially unchanged compared with the fourth quarter of 2014 and 9% higher than the third quarter of 2015.... During the quarter, total assets under supervision increased $64 billion to $1.25 trillion. Long-term assets under supervision increased $16 billion, including net inflows of $9 billion, spread across all asset classes, and net market appreciation of $7 billion, reflecting appreciation in equity assets. In addition, liquidity products increased $48 billion."
It adds, "Net revenues in Investment Management were $6.21 billion for 2015, 3% higher than 2014, due to slightly higher management and other fees, primarily reflecting higher average assets under supervision, and higher transaction revenues. During 2015, total assets under supervision increased $74 billion to $1.25 trillion. Long-term assets under supervision increased $51 billion, including net inflows of $71 billion (which includes $18 billion related to an acquisition), and net market depreciation of $20 billion, both primarily in fixed income and equity assets. In addition, liquidity products increased $23 billion." BlackRock also released its Q4 earnings this week, while Federated, State Street and T. Rowe Price will release their latest earnings next week.
In other news, JPM Securities' most recent "Prime Money Market Holdings Update" looks at various trends, including Fed RRP usage, Prime to Govt fund conversions, and rising yields. Authors Alex Roever, Teresa Ho, and John Iborg write, "Flows within the taxable MMF universe finished flat in 2015, and total AuM registered $2.485tn at year-end. While no reform related investor outflows were evident during the course of the year, we did see close to $200bn in AUM officially convert from prime to government fund status. With less than $50bn left for conversion spread out over the course of 2016, we look for an additional $400bn to leave the prime fund complex via investor outflows, likely to be back loaded during the second half of the year."
On yields, they state, "Since the Fed hiked rates on 12/16, MMF yields have been on the rise. Indeed, both gross and net average yields on prime and government funds have increased by several basis points during recent weeks. This is ultimately good for MMF shareholders, but it may be awhile until higher yields are fully passed through to end investors. After years of waiving fees, many funds will need to reclaim lost revenue by initially not passing on higher asset yields. As such, it may take several months and multiple hikes for MMF shareholders to see substantial benefits from the rate hike."
JPM adds, "The 3 month maturity sector has served as a middle ground for where prime funds and banks have been getting done in fixed rate paper. While foreign banks have sought to issue in longer tenors for regulatory purposes, Fed expectations and liquidity management have led prime funds to keep maturities short. As such, issuers and investors have met in the middle in 3's. Indeed, holdings data shows a large of amount of bank CP/CD rolling off during February and March."
They write, "Typical turn dynamics and prime to government conversions led to a stark reduction in holdings of bank debt at the end of the year. In total, prime fund bank holdings fell by $173bn or 17%. While the decline was driven by time deposits, almost every other bank asset class fell by some degree. As usual, European banks were behind the pullbacks, likely because regulations require them to report their respective balance sheets based on a snapshot at year-end, versus a daily average for their US counterparts."
On Fed RRP, JPM comments, "Fund allocations show that prime funds increased usage of the RRP as a substitute for reductions in bank supply. Indeed, prime money funds increased RRP facility usage by $146bn month-over-month. Away from banks and RRP, most other sector allocations remained stable. Usage at the Fed RRP facility touched a new historical high at year end, receiving $475bn in demand. While $300bn in term RRP was offered, there were practically zero bidders as counterparties waited to tap the overnight facility. Of the $475bn of RRP demand, money market funds represented $409bn or 86% of usage. Government funds took down $205bn while prime funds took down $203bn."
They continue, "Interestingly, the new parameters of the overnight RRP facility ($2tn aggregate cap and removal of auction mechanism) did not spur an increase in MMF usage. This was true for both prime and government funds. Comparing to the end of Q3, MMF demand for RRP increased by only $9bn. Additionally, fund size did not seem to have an effect on whether RRP allocations were increased. Furthermore, it is also interesting to note the lackluster usage of the facility following its spike at year-end. This week, usage of the RRP has averaged less than $90bn, lower than levels under the previous $300bn cap. Initially, we had called for demand to increase in the weeks following liftoff, and this has yet to materialize. For now, we think seasonal factors are at play."
Finally, on WAMs, the report adds, "Both prime and government MMF had very short WAMs at year-end, and are likely extending these in the new-year, and are now buying longer maturity instruments with yields above the ON RRP. GSEs were aggressive in courting MMF cash over the past two weeks, and that supply was likely absorbed. Likewise, dealers that had temporarily pulled back from the repo market at year end likely returned, prompting fund managers to use-or-lose their available lines. There will be plenty of redeploying and courting of cash in the money markets over the next few weeks. Ultimately, it will take some time to get a good picture of where the baseline demand for ON RRP will settle."
