Regarding deposits (liabilities) vs. loans (assets), if NTBK's costs are sufficiently low, they could borrow money at 4% (SuperValue Checking) and buy adjustable-rate mortgages at 5.5%, yielding a 1.5% return on assets, assuming that the $4.50 monthly fee covers expenses.
The beauty (and horror) of banking is the leverage, normally 20:1. For each $10 million of equity and subordinated capital, they can carry $200 million of mortgages and earn $3 million per year.
If they can earn that 1.5% spread, after expenses, they can raise as much capital as the want, so that earnings are unlimited.
This is my understanding of banking economics, not a picture of NTBK in particular. My point is that with sufficiently low expenses, NTBK need not originate loans at all. Other banks have done this with lower interest rates (checking), but higher expenses.
Low costs in banking are extermely powerful, in my opinion, in these days of low customer loyalty, and the markets do not generally recognize their power.
IMHO, Peter
Peter |
