AGNC - Earnings call transcript Q4 2017

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Katie Wisecarver

Thank you, Phil, and thank you all for joining AGNC Investment Corp fourth quarter 2017 earnings call.

Before we begin, I would like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. in of are subject this without included of only to statements notice. date the presentation forward-looking this made presentation as change All and are those results that in included the Factors periodic differ cause Securities factors AGNC's Risk the actual of filed Certain materially statements could the from reports contained section are and in forward-looking Commission. to with Exchange Web on available SEC.gov. at are site the SEC's Copies statements We disclaim unless forward-looking any law. our obligation required to by update site XXX-XXX-XXXX, Web the will XX is be conference available can archive accessed telephone ID An this be our recording of presentation by on dialing and number and through February XXX-XXX-XXXX XXXXXXXX. or the corner. To our QX Web view on to link the presentation, XXXX click the turn site, Earnings agnc.com, right in slide and Presentation lower the both click presentation slide option audio, conference and the in webcast on link the section the to the or call call. Select for view the during streaming slides Executive President Accounting Kuehl, Participants Kain, Bernice Gary on Federico, Chief President; Chief Vice Vice President; Officer; Bell, Chris Peter call Financial and Senior Vice President today the Executive Pas, Senior Chief and Officer; officer. Executive Aaron Vice include and that, the call over to With I'll Kain. Gary turn

Gary Kain

Thanks, Katie, your in for of and all to you AGNC. interest thanks

with from XXXX We which return while valuations theme AGNC's yield sensitive flatten place in The remained volatility interest the very as full to during remain year credit in QX. new for the Equity of quarters and muted. records to brought income pleased are prior the quarter quarter yet XX.X%. to in continued key continue products markets fixed curve again. The fourth improved Economic entirety. rate X.X% its performance set for was economic return

rate unprecedented XX at term stable hikes how on interest growth and X.XX%. that fad especially XXXX, from range were Even is closed This interest at the XX stronger X.XX% year that of the more began and consider an considering treasury global materially yield quarter X.X% of between in X.XX%. XXXX. rates illustration an closed year XXXX incredibly three in year and longer every the is As the tight the

XXXX tenure or from XXXX this we has the a rates higher similar are already so move basis spike tan tape widespread points little we back optimism following to to financial anticipate in in to in economy in continue largely the surrounding or somewhat While XX global believe election. the but rates XXXX, increase there late to reason we the significant experienced about is the believe point, To priced the is markets. biased far

attractive landscape could as MBS, for should somewhat anticipate Fed spreads Turning an turn we impact decline against mitigate incremental in Accordingly the increase absorb steady XXXX improve investors to even agency net the in the other during challenging wind the products. that market to to return levered value of the competing agency on This purchases. relative MBS remain especially levered we supply relative to technical becomes backdrop MBS help and expect more in a spreads.

consider their stock current the typical toward when An comes environment. As hold the important extremely in diversification weaken out vast on given if total risk relative AGNC very portfolios mortgage XX%. we to a on end. portfolio have have of return well seen the to benefit said in have not with majority even provides run to if disposal in if performed can AGNC current should to investors the bull cyclicality achieve XXXX continuation few runs the alternatives equity the the the That one market heavily tremendous of investment outperform the counter of valuations or mindset. that risk evaluating up that economy to is only ROE are almost returns the were This assets of investments in benefit investors' in steam. a current is the higher a investor agency MBS equity the the of ability most space at REIT of biased agency side, the Agency an

economy $X.XX necessary $X.XX condition from With attractive the $X.XX the income Comprehensive to a a excluding for turn increased for by results dollar QX let net our slide and return. [am] no share, spread income So, AGNC is means catch-up in roll generate prior four per review weaker quickly share me introduction as to and to quarter. quarter. that totaled for per

as six share bottom on per income slide the despite importantly declined flattening the and spread interest see hikes roll and only you curve. four of More dramatic past quarters over net $X.XX the dollar of XX rate our yield

high this of very a hedge result. significant driver favorable ratio Our is

net Additionally, roll from income we dollar that came of $X.XX our our reported position. spread TBA

As discuss is the on TBAs Chris our advantage longer-term in line will with funding expectations. currently

requirements. $X.XX we have position incremental also book would The be had today we coming if net As than balance $X.XX we our less aggregate income entire enhances incremental position more limited on return net prior sensitive because roll been of size in with at a quarter. dollar the intention TBA to sheet per worthwhile spread that this and economic $XX.XX funded to just I have quarter Tangible our our only of spread can assets TBA the replaced X.X% and likely result, To income estimate fourth is the our clear reported. do no per and $X.XX the specific them position. with we be margin specialness our our to want reduce is X.X%. share given to the repo liquidity with during share lower risk. doing pre-payment value the declined that

and current minimal selloff year tangible January to X rates indicates Additionally, decline leverage only portfolio value despite our to X%. quarter. aggregate a size estimate about the book the of in were our during in date Changes of to

exceeding Net want dividends in full roll XXXX. declared spread Turning share. $X.XX significantly income to some per income the I comprehensive dollar the $X.XX quickly and $X.XX during to slide six was Net for recap highlights share per year. totaled

mentioned good and very to portfolio. this XXXX Chris year As was total to XX.X%. totaled shareholders. like return AGNC At I agency the economic earlier at In the discuss to over XX.X% was point our and turn market returns call for stronger a stock and materially I'd aggregate its

Chris Kuehl

X. turn let’s to Gary, Thanks slide

you Fed. can continue yield curve increased basis XX-year the quarter. yield. but basis As spreads during on additional points see the a eight the minus few while the MBS basis performed plus increased option prior unchanged to versus MBS treasury in only points during the increases adjusted as LIBOR or from in points reasonably Agency the notes flatten XX well quarter notes price XX-year the market quarter from fourth rate Two-year

of Let’s XXst. leverage, turn was quarter-over-quarter, the little Consistent investment with to X. slide balance billion that as portfolio XX.X risk December changed

factors. top levels overall the prepayment seasonal you in X, see slower assets interest right contained given On our that remain speeds slide of rate can the action, of well combination

Our average position CPR the in down relatively QX was average at XX.X X unchanged last for of XX.X XX.X% our billion. fourth CPR TBA from The was quarter balance quarter.

TBA ending XXst somewhat lower the However, in period the financing billion. balance quarter. December fourth late was roll-implied as at moderated specialness of XX.X

risk I’ll environment funding turn now funding implied Peter to over XX and financing the run, call low XX prepayment relatively expect rates repo large management. the to and points we of maintain around average a basis to mortgage to through against risk Over roll we the position. discuss a backdrop to longer expect TBA

Peter Federico

I’ll review financing Chris, Thanks activity. a with start brief our of

cost increased funding our funded to dollar These cost higher rate for on-balance led the fed’s in year to factors of rates end our for the assets. Our pressure. during repo higher mid-December due combination the assets quarter and similarly sheet and TBA hike funding funding

Specifically, quarter. very nine our XX applied basis increase points to up two estimated our We Taking assets XXX a experienced which costs we prior points a funding prior our fourth similar for from quarter, was basis basis sources points average the XXX in quarter. quarter. points, points from funding points XXX be points basis the previous these for basis the funding basis from XXX rate the the the XXX cost a quarter the basis average quarter repo together, financing for the in was TBA up up

Our as received a increased months but swaps decline improved, includes the increase cost declined as This an quarter-over-quarter. which fix consistent our quarter also swaps, pay our of three extent expense the LIBOR floating by to of leg in the hike. with funds swap aggregate driven the of our which was lesser rose cost rate during pay-fixed Fed’s

five TBA funding. cost Our our half during improved basis offset swap of and thus quarter increase and the about repo points in the

of a basis XXX a during our cost six the quarter average points basis aggregate funds increased As result, to points. just

presentation. reference, of your these we XX slide funding numbers on For the provide

slide to XX, activity. I’ll Turning review our quickly hedging

to dynamics rate operate quarter. Gary interest market the that the chose risk with we Given during less discussed,

to of billion portfolio size increased over the liabilities. of XX% and our funding hedge increased our such, As a little we ratio to XX hedge

also number balance Slide of hedges give XX. seen rate X.X actions be The billion on moves We against us of and can the larger protection increased quarter to swaption hedges volatility. our higher option-based at effects end. bringing these greater These

the X.X the years, X.X our year just As years down we table was shown at GAAP duration from prior end quarter.

in scenario our In XXX our basis addition, is the to due estimated up duration part X.X swaption point gap in just position, years.

on our interest in XX, shows to Slide the table higher a rate reduction rates. Lastly risk sensitivity similar

turn is to actions projected the our and years. the assuming estimated in basis the lowest the that taken, over reported table, in asset back last decline X.X have points scenario With we X.X%. is value where decline I'll rates to sensitivity small that relatively at This higher shown on interest net As increased call rebalancing XXX Gary. no are rates the over

Gary Kain

I the point lines up ask questions. this like at to and the Thanks, to open would to operator

Operator

first George question Bose KBW. with ahead. Please The Instructions] [Operator from go comes

Bose George

since the quarter book end. on for update Thanks value

with versus -- us color cetera end? follow-up the returns on a year you rates give some incremental now Just moving et the can

Gary Kain

at wider of beginning They really tighten mortgages They it wouldn’t I too but significant. mean haven’t I year and little have sort really early that they -- a moved of the are call back. much.

So, today. move update a yield it's spreads big there not helps but here an would the say is then and I in little increase a change

Bose George

a the it of kind return terms In of qualifying return? is double-digit low now,

Gary Kain

there I zipcode. XX% -- let's Yes, that around its double-digit right would say in

Bose George

of And say spreads are is it on sidelines the side, the given CRT royal? on just then you on just safe your et there kind to comments after the cetera,

Gary Kain

fundamentals long investor the tremendous in comment realistically market The is product conforming credit the of there. labored own Yes, of I and is particular housing think the funds. a the being concerns we way out that by that’s in have have which now that housing -- market we reality right while no confidence the safe squeezed

it's trends that shrink to would position of more rather if likely so, continue And growing. a matter current as fact be not I than probably look we think practical the

Bose George

pretty was talked And more on up and you just that then Can you curious that could about leverage. kinds us It have updated just just number going up? take scenarios thoughts overtime, about leverage? stable, give the one of on that for

Gary Kain

it’s that is are leverage at with to I glad really if higher nothing's comments last you respect more the run in leverage. plan we're leverage, and years comments little very to a we to materially year for something wouldn't certainly one short to with I the that and opportunistic nothing and year clear, anything our I'm you over two the mortgages trend and it to be short has a respect see we on we'd we that good beginning I But made the pick and that focused we be back to now want changed up expect if run made challenging question, at have go think higher be with do very going operating the landscape so the we're I feel that's the this changed comfortable I that. technical be from so the to view but asked

Operator

question go with next the ahead. please Douglas from Harter line The comes Suisse, of Credit

Douglas Harter

something risk rate also landscape Can challenging further. think you of you just with you is that what you commentary substantially you a that outlook might and you don't your lower about higher sort your might of tighten for risk talk like see up you current do levels of but that technically maintain kind given or moving it’s metrics Thanks. interest said do rates

Peter Federico

we entered get that practice the move we said the Hi with a thanks interest I defensive rate we exposure we about quarter. rate hedge reduced in it for our it's as happy but our do quarter Doug, delta is the question, rate Yeah, even though position given fairly into moves. the Peter. fourth We're to obviously as

current fourth about to So having XX% was our XXX%. this of quarter, to have far, added of at added was Then January few more a we as a position the continue do We our a our about at as mix. meaningfully for protection sort we'll we year go position. little more give moves end cheap mentioned with beginning we actually have the they options not outsize hedge those the hedges but it his ratio to to prepared a the in I relatively a optionality and higher but little have at but of hedge further some actually a mentioned, operate so, end defensive rates like been in environment. remarks bias a Gary the too us against

Gary Kain

you it's up been is sort and remarks Peter very unique, the if in his about show scenario XX of look Just is to The exposure to hundred to discussed a slide actually addition our happens us that one thing to the run prepared up long hundred you is add up-rate exposure at in for our gap to want in a if time. which we X.X modeled and scenario. exposure than what lower how but than scenario. an think our we And where may years lower in duration scenario,

position some have some a and actually given At a to go the delta the to if we X% we point year this rate the be done kind of comfortable rate a of gap, further So, were to in way point exposure other our hedging incremental environment. very rates starting might we to our feel were the so like position very while a perspective to reduce continue rising start because do we'd risk. might good we be from half on duration if we're interest above so and with we

Douglas Harter

said what that three this your increases you staying the see XXX% to to year guess just spread about we're Peter perspective. hedge so And a think then a I about of you just talk rate on if interest can you kind ratio risk, from or sensitivity going just

Peter Federico

of remarkably include if only look of you measured Yeah, margin interest think raise at net includes us in whole net for hedge, I of all mentioned, quarters things well, at and stable net and interest hedges. that the look cost five thanks income, cost people because our XXs moves for that Gary as question of the been fed rate the doesn’t several But picture margin our cause is that had one we've already look funds give at our our swap has that funds below now you at doesn't rate. our our when spread to it it despite continuing

as look both sheet our our ratio that balance cost balance swap position I and sheet, down what the the repo for off I will to extra treasuries And to you and our see we because earnings maintain funds going you’re net come down So be the overtime include that’s hedges bit think continue of liabilities come funding. holistically you’ll to the know stable notional margin it bit little you to fairly funding us on on of to amount page see that gave think that’s our little a our to at is our essentially TBA and doesn’t our interest hedges but information that of our of XX you presentations. a and picture really important have measure again high why of and reason hedge of one same including that and have all

high going break of But with down that gives forward. you net for our hedge you and of us operate going we’re the a So the continue that lot to gives know protection earnings a you to ratio exactly interest see overtime can drivers margin. a

Operator

of last with go Richard Please [Operator Shane currently comes from question the queue the JPMorgan. ahead. Instructions]. line in The

Richard Shane

of through that And I’m say an in at which spreads I’d spreads. basis walk love expectation the rates XXX hearing from to higher of you scenario guys think points. basis I sort XXX let’s is are widened up rates expectation just points, a wider of

of is go that of do In you today. expect effectively sheet that you them hearing up duration. where think ratio I’m will do in modestly, compression? where that actually ROEs what maintain that that we think you hedge you you are scenario, or Do sort says stemming can lowering in ROEs scenario, the balance evolves the think context enhance the I guys you some lever as the

Gary Kain

noticeably good so scenario. ROEs a expand that It’s think question, will in I would

Let basis I and me points from we today we are next just on you say, be on know even we the on little XXX early or interest maybe year. Xo we of that see could think over the projections, side I the see a would are rates varies but likely, would a into don’t say the of probably we where move course year what higher what would

than what the most I we was on surprised the We as and on widening are instruments you absolutely basically more products bought it the when Mortgages, impacts buying fed So, of would with and will we already favorable challenging. just attractive think say but we mortgages, QE to more spread things. the saw other this contained. side be mortgages was more of and what agency people very point being definitely wouldn’t less some see so competing at treasuries spread are is other those technicals think be saw

has assume direction. And going same happen one is the thing other so going speaking to to in practically the

you’re to disassociate to going you completely complete not So, mortgages going else. everything a discount see see from not -- are

materially practical yields help against I spreads is help ROE. a then of XX basis more gap larger will XX higher spread wider But that a more more leverage duration alone points and widening of but kind will to and ROEs, So, think mindset. in the even higher backdrop

increase forward described. if So, in as purchases on scenario that unfolds pretty I go you significant could ROE see a

Richard Shane

basis widening spread your points aggressive points sense, XX, pretty basis and again XX themes it, Got I seems makes very realistic. XXX agreed

me XX a Let love see? question which is different the to What next you be when you scenario that the months what about ask way would in you the would think are the for to that looking what's feeling when with your oh for -- one that that’s some you going put shops think be bad it and us. that to about of down

Gary Kain

think honestly, not the or technical the in which see would of this we run, to at year overreact point like So factors question. is to out some the short spreads I

speak. think -- to And so definitely to it's opportunity us reset would I possible. reasonable give a leverage that's that an

So that positive. would be a

rate on scenario side I in opportunity the mortgage some move while we create see have think usually would way portfolio. an in think at extreme up described rates turnout favorable the the extreme to more we not like point. I a to volatility levered for It's would

don't always terms want In managing again challenging as mortgage scenario, I really I to think and a in say our extreme would would direction move portfolio of be I see, the scenario of either any I in certainly purchases But the be something would increased short help that’s flattener in envision in we run. the option probably bull not best regard. near-term. the that a not But think when

Operator

have would Gary to remarks. the now like concluding I We over call the session. to turn question for any Kain answer back completed and

Gary Kain

for call quarter. joining speaking on we and you XXXX our QX us you Thank next look with forward to

Operator

The XXX-XXX-XXXX-, today's conference An call. Thank XX, XXX-XXX-XXXX. through you telephone be dialing XXXXXXXX. call February this of the or will be website is and for presentation joining can this of has archive now number by on a AGNCs id And concluded. conference recording available accessed

You disconnect. now may

AGNC Investment (AGNC) 1 Feb 182017 Q4 Earnings call transcript