As yields rise, some U.S. banks shift cash to Treasuries
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[October 15, 2021] By
David Henry
(Reuters) - Some big U.S. banks are buying
more U.S. government securities as yields start to rise and the Federal
Reserve appears ready to taper its bond-buying program - a balance sheet
shift that analysts say could boost bank earnings by several percentage
points depending on how they play their hands.
Bank of America Corp and Citigroup Inc on Thursday said they had picked
up extra net interest revenue during the quarter by buying securities
with higher yields.
JPMorgan Chase & Co, however, said on Wednesday that it continues to
hoard cash, expecting rates to move higher as Chief Executive Jamie
Dimon predicts.
Citigroup Chief Financial Officer Mark Mason said the bank has been
buying Treasuries and mortgage-backed securities.
"We've got a strong liquidity position and we've been putting some of
that to work," Mason told reporters.
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Bank deposits have piled higher than ever, fueled by money from Federal
Reserve purchases of bonds, government stimulus payments and savings
from consumers. Meanwhile, bank net interest revenue from securities and
loans, a key source of income, has plummeted as the Fed kept rates low
and borrowers paid off loans.
How the country's largest lenders manage that mix of cash and securities
on their balance sheets will help separate winners from losers in coming
quarters, as uncertainty grows over the inflation and interest rate
outlook, analysts have said.
The typical big bank could get a 7% boost to its profits before loss
provisions and taxes by investing its excess cash at 1.5%, analyst Jason
Goldberg of Barclays estimated.
Goldberg said it was too early to say if an uptick by some banks in
securities purchases signaled a new industry trend.
Predicting yields and managing interest rate risk is among the biggest
challenges for bankers. If they buy securities to earn more interest
now, they risk missing out on even higher yields, left with securities
that have lost value.
The yield on 10-year Treasuries has been on a roller coaster this year
with changing views of Fed policy and inflation. After climbing to 1.75%
from 0.9% in the first three months of the year, it fell back 1.15%.
JPMorgan's Dimon predicted in July that it would go to 3%. The yield was
at 1.51% late on Thursday.
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![](../images/101521pics/2021-10-15T002657Z_2_LYNXMPEH9D1GN_RTROPTP_4_USA-BANKS-RESULTS-YIELDS_small.JPG)
JPMorgan Chase CEO Jamie Dimon speaks at the North America's
Building Trades Unions (NABTU) 2019 legislative conference in
Washington, U.S., April 9, 2019. REUTERS/Jeenah Moon/File Photo
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The changing outlook for higher yields and more lending has driven bank stocks
this year. The KBW Bank Index is up 39% year-to-date, twice the gain of the S&P
500.
Wells Fargo & Co added securities in the first half of this year, but has
stepped back recently to be ready for higher rates, Chief Financial Officer
Michael Santomassimo told reporters on Thursday.
Bank of America has been especially aggressive in investing its cash in
securities, nearly doubling the portfolio over the past year. Debt securities
rose to 36% of earning assets in the quarter from 22%.
In contrast, JPMorgan has kept its securities steady around 18% of assets as it
has stockpiled cash.
During the third quarter JPMorgan kept $757 billion of cash compared with $565
billion of securities.
"Our position here hasn't really changed," JPMorgan CFO Jeremy Barnum told
reporters. "We are still believe in a robust recovery. We still think that comes
with higher rates."
Dimon, when asked by analysts how much cash JPMorgan could put into securities,
said: "We can easily do $200 billion."
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A risk banks should be worried about, he said, is high inflation and high rates.
"Being very liquid protects us."
Still, Barnum added that as rates come closer to JPMorgan's view the bank may
find "some opportunities for a little bit more deployment of cash."
(Reporting by David Henry and Elizabeth Dilts Marshall in New York and Noor
Zainab Hussain in Bengaluru; Editing by David Gregorio)
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