Oct 14 Reuters -- Some big U.S. banks are buying more U.S. government securities as yields start rising and the Federal Reserve appears willing to taper its bond purchasing 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. each said on Thursday that they had picked up extra net interest revenue during the quarter by buying securities with higher yields.
However, Chief Executive Jamie Dimon said on Wednesday that it continues to hoard cash, expecting rates to move higher as Chief Executive JPMorgan Chase Co predicts.
Chief Financial Officer Mark Mason said Citigroup was buying Treasuries and mortgage secured securities to help raise funds.
I've got a strong liquidity position and we have been working some of that to work, Mason told reporters.
Bank deposits have piled higher than ever, driven by money from the Federal Reserve reserves buying of bonds, Government stimulus payments and savings from consumers. However, interest net from investments and loans, a key source of income, have dropped 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 divide losers from winners in the coming quarters, as uncertainty grows over inflation and interest rates, analysts have said.
The typical big bank could get a 7% boost to its profits before liquidation provisions and taxes by investing its excess cash at 1.5%, analyst Jason Goldberg of Barclays estimated.
Goldberg said it was too early to tell whether an uptick in some banks in securities purchases signaled a new industry trend or not.
Predicting interest rates and managing them is among the biggest challenges for bankers. If they buy securities to earn more interest now, they risk missing out on even higher yields and left with securities that have lost value.
In this year the yield on 10-year debt was on a roller coaster with changing views of Fed policy and inflation. After falling from 0.9% to 1.75% in the first three months of the year, it recovered 1.15% again. Dimon predicted by JPMorgan in July that it would go to 3%. The yield was 1.5% late on Thursday.
The changing outlook for higher yields and more lending has driven asset prices this year. The S&P 500 Index is up 39% year-to-date, twice the gain of the KBW Bank Index.
Wells Fargo Co added securities in the first half of this year, but had stepped back recently to be ready for higher rates, Chief Financial Officer Michael Santomassimo told reporters on Thursday.
Bank of America has been particularly aggressive in investing its cash in securities, nearly doubling the portfolio over the past year. Besides the high fees and high deposits, debt securities rose from 22% to 36% of earning assets in the quarter.
In contrast, JPMorgan has kept its securities steady about 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 said to reporters. We still believe in a robust recovery. We still believe that comes with higher rates. When asked by analysts how much cash could JPMorgan invest in securities, Dimon said: We can easily do $200 billion. A risk banks should be worried about, he said: high inflation and high rates. Being very liquid protects us. Still, Barnum added that JPMorgan's view could lead to some opportunities for a little bit more cash deployment in the bank.