texpo_april 2016_final
TRANSCRIPT
TEXPO April 18, 2016
Jeff Avers SunTrust Bank
Director, Corporate Liquidity Specialist
Liquidity Management in the New Era
Regulatory Update
Matthew Roush HollyFrontier Corporation Manager, Cash & Treasury Operations
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Regulatory Reform: “Strengthened but not Simplified”
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Higher bank interest expense on deposits
Reduced Revenue Streams
Volcker Rule
Potential divestitures
Reduced Fee Income
NSF/Overdrafts (Regulation E)
Debit Interchange (Durbin Amendment)
Increased Balance Sheet Costs
Basel III Capital Ratios
Basel III Liquidity Coverage Ratio
Increased Fees
Uncollateralized daylight overdrafts
FDIC
2a-7 Money Fund Reform
• 2010 Changes
• 2016 Changes
Development costs for new products Employee training
Reduced value of deposits
Reg Q repeal
Basel III - Higher liquidity levels needed to
support the commercial business
Increased cost of compliance & oversight
Human, Systems, tracking and reporting
Increased emphasis on minimizing marginally
profitable and unprofitable relationships
Basel III “non-operating” and FI deposits
Collateralized Deposits
Syndicated Credit Facilities
Increased Bank Expenses Increased Customer Expenses
Regulatory Reform – A Sampling
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Banks: 2008 – 2012
Fed Funds Target lowered from 4.25% 1Q 2008 to 0-.25% 4Q 2008
Unlimited FDIC Insurance: late 2008 through December 2012
FDIC Coverage raised from $100K to $250K per depositor
Regulation Q Repealed
Money Funds: Implemented 2010
Max Weighted Average Maturity reduced from 90 to 60 days
30% of portfolio must mature within one week and 10% must mature overnight
Max of 2nd tier securities reduced from 5% to 3%
2nd tier issuer limit reduced from 1% to 1/2%
Max maturity of 2nd tier securities reduced from 397 to 45 days
Key Regulatory Changes Impacting Liquidity Management
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Corporate Cash Has Been Increasing
Grew from $500 Billion in
1988 to more than $2.2
Trillion at the end of 2015
Checkable deposits as a
percent of Corporate Cash
have increased steadily
since 2008 • Relative Value of ECR
• Unlimited FDIC through
12/31/2012
• Declined from 25% in 1988
to 1.9% in 2008 , before
growing to 20% in 2013-15
Trends In Corporate Cash
Source: Federal Reserve Bank
Source: Federal Reserve Bank
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Market Rates for Cash Investment Instruments
Alternative Cash Investment Options
• Rates obtained from (1)
WSJ Money Rates, (2) Crane
Data (money funds) and (3)
State-specific LGIPs
SunTrust Sweep Yields
As of March 2016
Master Note 10 bps
Repo 4 bps
Federated
Prime Fund
8 bps
Federated
Treasury
Fund
4 bps
Market rates continue to remain extremely low
As of late march overnight, 30-day and 90-day rates are at their highest levels in 7+ years, but in-line with those seen since the December 2015 Fed rate hike
• One-month and three-
month Libor are near
their 52-week highs
• US Treasuries, 30-day
CP, Eurodollars, and
money market funds are
all at or near their 52-
week highs as well
Short-term Investment Instrument
Rate as of
7/13/2011*
Rates
11/26/2012
Rates
11/20/2013*
Rates
2/27/2015*
Rates
3/30/2016*
Overnight Instruments
Fed Funds 6 bps 16 bps 12 bps 10 bps 39 bps
Repo 2 bps 29 bps 8 bps 18 bps 48 bps
Bank ECR (Analyzed Business Checking) 35 bps 25 bps 20 bps 15-20 bps 15 -50 bps
Bank Hybrid Analyzed ECR + Interest Checking 25/5 bps 20/5 bps 10-15bps 10-15 bps
30-Day Instruments 11/26/2012 11/20/2013 2/27/2015 3/20/2016
Treasuries 2 bps 15.5 bps 8 bps 1.5 bps 20 bps
Commercial Paper 12 bps 14 bps 7 bps 8 bps 34 bps
Eurodollars 12 bps 12 bps 10 bps 10 bps Not Quoted
Libor 18.7 bps 20.9 bps 16.7 bps 17.2 bps 43 bps
Bank Money Market Account Standard Rate 25 bps 15 bps 12 bps 10 bps 15-20 bps
90-Day Instruments 7/13/2011 11/26/2012 11/20/2013 2/27/2015 3/20/2016
Treasuries 3 bps 10 bps 8 bps 6.5.bps 30 bps
Commercial Paper 15 bps 16 bps 12 bps 14 bps 48 bps
Libor 24.9 bps 31.2 bps 23.8 bps 26.2 bps 63 bps
Eurodollars 15 bps 20 bps 15 bps 15 bps Not Quoted
AAA-Rated Taxable Money Funds: 7-day Yield as of 6/30/2011 10/30/2012 10/31/2013 12/31/2014 2/29/2016
Crane Treasury Institutional MF Index 1 bps 1 bps 1 bps 1 bps 9 bps
Crane AAA Prime Institutional MF Index 4 bps 9 bps 3 bps 2 bps 24 bps
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Wall Street Journal
December 7, 2014
“Banks are urging some of their largest customers in the U.S. to take their cash elsewhere or be slapped
with fees, citing new regulations that make it onerous for them to hold certain deposits. The banks,
including J.P. Morgan Chase, Citigroup, HSBC Holdings PLC, Deutsche Bank, and Bank of America,
have spoken privately with clients in recent
months to tell them that the new regulations
are making some deposits less profitable,
according to people familiar with the
conversations.
In some cases, the banks have told clients,
which range from large companies to hedge
funds, insurers and smaller banks, that they
will begin charging fees on accounts that
have been free for big customers, the people
said. Bank officials are also working with
these firms to find alternatives for some of
their deposits, they said.”
Banks Urge Clients to Take Cash Elsewhere
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New & Proposed Regulatory Changes Impacting Liquidity Mgt
Basel III LCR
2a-7 Reform
Reg Q Repeal
Fed Policy
9 www.suntrustrh.com
Implied Probability of a 2016 Rate Hike
Source: Bloomberg
* The implied probability
of a 2016 rate hike has
come down
significantly since the
beginning of January
Probability of a Fed Rate Hike*
By…. 3/29 2/16 1/5
April 0% 9% 56%
Mid-Year 28% 24% 79%
Year-End 63% 45% 92%
10 www.suntrustrh.com
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
1990 1994 1998 2002 2006 2010 2014 2018
2018
"Long-term"
1994 - 300 bps over 13
1999 - 175 bps over 12
2004 - 425 bps over 25
Fed Projections
2016
2017
The Fed remained on hold at its March meeting
•In March, the FOMC left the Fed Funds target rate at 0.25%-0.50%, noting that while inflation has picked up
in recent months, global economic developments pose a risk to the US economy going forward
– The Fed’s Summary of Economic Projections backed up the Committee’s commitment to a slow and
gradual tightening. The median expectations for the Fed Funds rate at the end of 2016 and 2017
decreased to 0.875% and 1.875%, down 50 bps from their December projections
•Historical tightening cycles show the Fed has tightened on average 22.5 bps per month for at least 12
months. The current 2016 median projections suggest the Fed anticipates four, 25-bp increases next year
The Importance of Recent Fed Commentary
Note: Follows the median of the Fed’s Projections. Implied 3mL forward curve is for approximately four years from start date. Assumes 3mL resets 25 bps above
the Fed Funds Rate (historical average since December 1984)
Source: Bloomberg, Federal Reserve
(a) The central tendency excludes the three highest and three lowest projections for each variable in each year
(b) Longer-run projections for core PCE inflation are not collected
Fed Funds Target Rate with Last Three Tightening Campaigns Projected Fed Funds Rate by FOMC Members vs Forward Curves
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2016 2017 Longer Run2018
3m LIBOR Forward Curve March FOMC Implied Curve
SEC 2a-7 Money Fund Reform
October 2016 Implementation Net Impact
Net Asset Value
Prime and municipal funds convert to “floating NAV”
- NAV to be calculated to 4 decimal places ($ 1.0000)
Treasury and government funds remain stable NAV
Liquidity Fee
Weekly liquid assets < 30% ► Fund Board may impose a 2%
redemption fee
Weekly liquid assets < 10% ► 1% redemption fee
- Fund Board can determine otherwise
Redemption Gate
Weekly liquid assets < 30% ► Fund Board may suspend redemptions
for up to 10 days
Implemented 2010 Net Impact
Max Weighted Average Maturity reduced from 90 to 60 days
30% of portfolio must mature within one week and 10% must mature
overnight
Max of 2nd tier securities reduced from 5% to 3%
2nd tier issuer limit reduced from 1% to 1/2%
Max maturity of 2nd tier securities reduced from 397 to 45 days
Reduced portfolio credit risk Reduced portfolio liquidity risk Reduced portfolio duration risk
Permanently lowered the yield relative to alternative investment options
Provides a process for money funds to follow when under stress
Empowers the Board to Act
Shifts certain risks from the fund to investors/shareholders
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Subject to Full LCR Subject to Partial LCR Not Subject to LCR
U.S. Bank Holding
Companies with ≥ $250
billion in total
consolidated assets
U.S. depository
institution holding
companies with ≥ $50
billion in total
consolidated assets
U.S. bank holding
companies (BHC) or
Savings & Loan Holding
Companies (SLHC ) with
< $50 billion in total
consolidated assets
*Includes the top 8 US
Banks ranked by assets as
of 12/31/2015
*Includes the 9th through
35th largest US. banks
ranked by assets as of
12/31/2015
*Includes the remaining
U.S. banks and bank
holding companies
* Source: Federal Reserve Bank Rankings as of December 31, 2015
Basel III Liquidity Coverage Ratio
The LCR requires a banking organization’s stock of unencumbered high-quality liquid
assets (HQLAs) to be at least 100% of its total net cash outflows over a 30-day
standardized supervisory liquidity stress scenario
Per the Securities and Exchange Commission:
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Parent Company Assets ($B) As of 12/31/2015
Assets
≥ $
250 b
illio
n
1 JPMorgan Chase 1,914
2 Bank of America 1,639
3 Wells Fargo 1,610
4 Citigroup 1,299
5 U.S. Bancorp 417
6 PNC Financial 348
7 Bank of New York
Mellon
319
8 Capital One 273
Assets
≥ $
50 b
illio
n
9 TD Bank US 246
10 State Street 241
11 BB&T 205
12 SunTrust 187
13 HSBC North America 183
14 CHASE Bank (DE) 149
15 Fifth Third 139
16 Morgan Stanley Bank 136
17 Goldman Sachs Bank 134
18 Regions Bank 125
Parent Company Assets ($B) As of 12/31/2015
Assets
≥ $
50 b
illio
n
19 M&T 122
20 Northern Trust 116
21 MUFG Union Bank 115
22 Ally Bank 111
23 Citizens Bank 108
24 BMO Harris 104
25 Capital One 102
26 KeyBank 93
27 Santander USA 90
28 Discover Bank 86
29 Compass/BBVA 85
30 Bank of The West 76
31 Comerica 71
32 Huntington 71
33 Zions BanCorp 59
34 First Republic 59
35 Deutsche Bank 52
Basel III Banks
Source: Federal Reserve Bank as of December 31, 2015
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Deposit Runoff Factors
Basel III Liquidity Coverage Ratio: Deposit Behavioral Issues
Stock of Highly
Liquid Assets
Stable
Deposits
(3 -5% Runoff)
Less Stable
Deposits
(10% Runoff)
Wholesale
Operational
(25% Runoff)
Other
Wholesale
Non-Financial
(40% Runoff)
Other
Wholesale
Financial
(100% Runoff)
Under the LCR standard, each
dollar of assumed runoff
requires an offsetting dollar
of liquid asset buffer. Runoff
assumptions will therefore
have a significant impact on
deposit profitability.
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Retail/Consumer
and
Small Business
Wholesale
Basel III Liquidity Coverage Ratio
Basel III Liquidity Coverage Ratio (LCR)
I II III
Bank Size (Assets) $250B+ $50-$250B < $50B
Basel III Compliance 100% 70% NA
Operating Deposits 25% 17.5% NA
Non-Operating 40% 28% NA
FSE (FI) Deposits 100% 70% NA
The LCR requires a banking organization’s stock of unencumbered high-quality liquid assets (HQLAs) to be at least 100% of its total net cash outflows over a 30-day standardized supervisory liquidity stress scenario
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Credit Risk: Depositors have a preferred claim
DIC National Depositor Preference Rule
Order of Settling Claims in the Event of a Bank Failure
1 Administrative Expenses of the Receiver
2 Any Deposit Liability of the Institution • Insured Deposits are settled first, followed by uninsured deposits
• Eurodollar and other offshore deposits are considered a general creditor
obligation
3 Any Subordinated Obligations
4 Any Other General or Senior Liabilities of the Institution
• This includes offshore deposits
5 Any Obligation of Commonly Controlled Depository Institutions for Cross-
Guaranty Assessments Under 12 U.S.C. §1815(e)(2)(C)
6 Any Obligations to Shareholders or Members (including Holding
Companies and their Creditors
Source: Federal Deposit Insurance Corporation
FDIC National Depositor Preference Rule
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Credit Risk: Depositors have a preferred claim
DIC National Depositor Preference Rule
Announced by Moody’s on March 17, 2015
Previous
Approach
• Each bank is assigned a single overall long-term rating
• Deposits and other forms of unsecured long-term debt are
considered as part of the bank’s long-term debt structure
New Approach • The bank is not assigned an overall rating
• Individual classes of long-term debt are each assigned their
own rating
• Deposits are given their own unique rating
• Long-term unsecured debt is given it own unique rating
Net Effect Deposits will likely be rated higher than a bank’s unsecured
debt in recognition of the depositor’s preferential claim over
that of general creditors
Source: Moody’s Investors Service
Changes to Moody’s Bank Rating Methodology
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When Interest Rates Rise, The Repeal of Reg Q1 plus Money Fund Reform
Could Drive Corporate Cash Balances onto Bank Balance Sheets…
Provided the Banks Want the Liquidity
Percent of Total Corporate Liquidity Held in Bank Deposits*
This is a positive outcome
for U.S. banks only if loan
demand and deposit growth
are in synch
*Source: 2010 AFP Liquidity Survey and Treasury Strategies’ Global Liquidity Research
¹ Repealed in 2011, Regulation Q was a 1930s Depression Era regulation that disallowed banks from paying interest on commercial checking accounts
¹
0%
20%
40%
60%
80%
USReg Q
FrancePost-Reg
Q
UKNo Reg Q
In countries allowed to pay interest on checking, corporates maintain 60-70% of
their liquidity in the banking system
Impact of Reg Q Repeal
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Post Reg Q Repeal, the Primary Purpose of Sweep Has Changed
Primary Purpose of Sweep
Old Paradigm Post-Reg Q
Obtain yield on idle cash balances Diversify away from bank risk
Obtain yield in excess of interest-bearing DDA
Predominant Sweep Vehicles
Money Funds
Eurodollar Deposits
Repo
Bank Parent Commercial Paper
Repo (eliminate credit risk)
Money Funds (diversify away from bank risk)
Bank Parent CP (yield enhancement)
Alternative ‘off balance sheet’ products
The Impact of Reg Q Repeal: The Future of Sweep
Source: Treasury Strategies’ proprietary research; Commercial
Deposit/Sweep Study & Global Corporate Liquidity Research
$-
$100
$200
$300
$400
$500
$600
$700
$800
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD
Total U.S. Sweep Balances ($B)
Matthew Roush, CTP Matthew Roush is Manager, Cash & Treasury Operations at HollyFrontier Corporation and Holly Energy Partners He has worked in various Treasury and Credit roles within the company since 2010. Prior to joining HollyFrontier, Matthew served in various Credit roles at both Leggett & Platt, Inc. in Carthage Missouri and Love’s Travel Stops and Country Stores headquartered in Oklahoma City. Matthew earned his Certified Treasury Professional (CTP) credential in January 2015. He graduated from Missouri Southern State University with a BSBA and earned his MBA degree from Missouri State University in Springfield, Missouri. He has been active with the Dallas Association for Financial Professionals since 2013 where he currently serves on the Board. Matthew is based at HollyFrontier’s corporate office located in Dallas, TX.
FOOTPRINT OF HOLLYFRONTIER AND HOLLY ENERGY PARTNERS*
• Pure play inland refining company with 443,000 barrels
• per day of crude capacity
• Proximity to North American crude production and attractive niche product markets
• Collaboration with HEP
provides strategic
growth opportunities in
logistics and marketing
operations
About the HollyFrontier Companies • 443,000 BPD Refining Capacity • 12.2 Nelson Complexity • Approximately 3,000 Pipeline miles
• 75% UNEV ownership • 25% SLC Pipeline ownership • 50% Frontier Pipeline ownership
• 13 million barrels of crude & product storage
• 7 Loading Racks and 10 Terminals
*As of 9/30/2015
Financial Highlights
($ in thousands,) 2015 2014 2013
Revenues $13,236,501 $19,794,327 $20,160,560
Net Income 804,634 723,806 767,823
Cash & Mkt Securities 210,552 1,042,095 1,665,263
Shareholder Equity 5,253,415 5,523,584 5,999,620
- $1 Billion Senior Unsecured Credit Facility
- Investment Grade Ratings: Moody’s Baa3 (Stable Outlook), S&P BBB- (Stable Outlook)
- $250 Million Senior Notes – 10 year 5.875% due 2026 (issued March 2016)
Financial Highlights
($ in thousands,) 2015 2014 2013
Revenues $358,875 $332,545 $305,182
Net Income 137,208 105,525 79,449
Cash & Mkt Securities 15,013 2,830 6,352
Shareholder Equity 383,101 449,821 466,934
- $1.2 Billion Revolving Credit Facility (upsized from $850 million in March 2016)
- Investment Ratings: Moody’s Ba1 (Stable Outlook), S&P BB+ (Stable Outlook)
- $300 Million Senior Notes – 18 year 6.50% due 2020
Treasury Department
Vice President & Treasurer
Manager Cash & Treasury
Operations
Treasury Analyst II
Manager Credit & Collections
Credit Analyst III
Credit Analyst III
Credit Analyst II
Manager Risk Management
Investment
Policy Investment Concerns
-Preservation of Capital
-Need for Daily Liquidity
-Constant NAV required in current IP
SCOPE
-This policy shall apply to Holly Frontier Corporation and all subsidiaries.
-Applies to cash managed in-house and cash with external managers, if any.
- Not applicable for benefit/retirement plan related investments.
OBJECTIVES (in order of priority)
- Safety of principal is foremost.
- Maintain liquidity sufficient to meet company’s projected cash requirements.
- Maximize after-tax return (net of fees) consistent with safety of principal and liquidity objectives.
PARAMETERS
- Permitted Investments
- Credit Quality
- Diversification / Concentration
-Maturity Restrictions
*The investment policy must be reviewed at least annually by the Treasurer and Treasury Manager, updated as appropriate with concurrence by the CFO and approval of the revised policy by the CEO.
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Summary of Today’s Discussion
SunTrust Bank, Member FDIC. SunTrust is a federally registered service mark of SunTrust Banks, Inc. 04/13
Basel III LCR
2a-7 Reform
Reg Q Repeal
Fed Policy