US banks' collateralized loan obligation balances hit record high in Q1

US banks' collateralized loan obligation balances hit another record high in the first quarter amid the recent banking turmoil and the upward pressure on capital requirements.

Bank holding companies had $166.14 billion in collateralized loan obligations (CLOs) in the period, compared with $165.04 billion a quarter earlier and $156.17 billion a year earlier, according to S&P Global Market Intelligence data.

Held-to-maturity CLO balances slightly decreased sequentially but continued to be notably higher than available-for-sale CLO balances. Banks' held-to-maturity CLOs amounted to $125.01 billion, versus $125.28 billion in the fourth quarter of 2022. Available-for-sale CLOs totaled $41.13 billion, up from $39.76 billion in the prior quarter.

Some of the headwinds that led to a decline in bank activity in securities in 2022 could be relevant again in 2023, specifically higher capital requirements and deposit outflows, Pratik Gupta, a CLO and mortgage-backed securities strategist at BofA Securities, wrote in a May 19 note.

On the bank front, key events to watch are the 2023 and 2024 Federal Reserve stress tests and possible changes to the regulatory regime, Gupta said. After those events, banks' CLO demand "should pick up on an incremental basis," Gupta added.

Total CLOs represent data reported in Schedule HC-B of the Form Y-9C filing under the field "Structured financial products supported predominantly by corporate and similar loans." The instructions for Form Y-9C state that structured financial products "generally convert a pool of assets (such as whole loans, securitized assets, and bonds) and other exposures (such as derivatives) into products that are tradable capital." Instructions state that holding companies should exclude securities backed by loans that are commonly regarded as asset-backed securities rather than CLOs in the marketplace.

Banks with the largest CLO balances

JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. — three of the Big Four US banks — ranked first to third, respectively, on the list of banks with the largest CLO balances as of March 31.

JPMorgan logged the highest CLO balance at $61.01 billion, down 0.1% quarter over quarter but up 12.5% year over year. Wells Fargo and Citigroup cut their balances both sequentially and yearly to $33.65 billion and $30.13 billion, respectively.

Among the bank holding companies on the list, United Services Automobile Association recorded the highest percentage increases in CLOs quarter over quarter and year over year. The company's CLOs amounted to $1.90 billion, up 15.1% from the previous quarter and 65.0% from the year-ago quarter.

Within the group, U.S. Bancorp reported the highest percentage decrease in CLOs sequentially, with a 15.8% drop to $789.0 million, while BankUnited Inc. booked the highest percentage year-over-year decrease with a 44.2% drop to $598.0 million.

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Western Alliance Bancorp. booked $2.44 billion in CLOs in the first quarter, representing a 10.0% quarter-over-quarter decrease and an 18.5% year-over-year increase.

The Phoenix-based company's investment securities portfolio grew by roughly $600 million to $9.1 billion after it sold $460 million of securities, mainly CLOs, Vice Chairman and CFO Dale Gibbons said during a first-quarter earnings call.