Some big U.S. banks are buying more federal government securities as yields start to rise and the Federal Reserve appears ready to taper its bond-buying program - a playbook 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 said on Thursday that they had picked up extra net interest revenue during the quarter by buying stocks with higher yields.
On Wednesday however, JPMorgan Chase Co said it continues to hoard cash, expecting rates to rise as Chief Executive Jamie Dimon predicts.
Chief Financial Officer Mark Mason said Citigroup bought Treasuries and mortgage-backed securities.
Mason got a strong liquidity position and we've been putting some of that to work, said James in reporters.
Bank deposits have piled higher than ever, driven by money from the Federal Reserve buys of bonds, government stimulus payments and savings from consumers. Meanwhile, bank net interest from securities and loans, a key source of income, has plummeted as the Fed kept rates low and borrowers paid off loans.
How the UK's large lenders manage their balance books with that mix of cash and securities will help separate winners from losers in coming quarters, as uncertainty grows over 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%, analysts Jason Goldberg of Barclays estimated.
Goldberg said it was too soon to say whether an uptick in some banks's securities purchases signaled a new industry trend or not.
Finance executives have been faced with many challenges while devising yields and managing interest rate risk. If they buy securities to earn more interest now, they risk missing out on even higher yields, left with shares which have lost value.
The yield on 10-year-rated Treasuries has been on a roller coaster this year with changing views of Fed policy and inflation. After falling to 1.75% from 0.9% in the first three months of the year, it moved back 1.15%. In July, JPMorgan Dimon forecasted that it will go to 3%. The yield was below 1.51% late on Thursday.
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 the 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 particularly aggressive in investing its cash in securities, nearly doubling the portfolio over the past year in the last decade. Debt securities rose to 22% from 36% of earning assets in the quarter.
However, JPMorgan stockpiled its securities around 18% of its assets as it steadyened cash.
JPMorgan kept $757 billion of cash in the third quarter compared with $565 billion of securities.
Our position here hasn't really changed, JPMorgan CEO Jeremy Barnum told reporters. To some degree we still believe in the strong recovery of USA. We still think that comes with higher rates. When asked by analysts how much cash would JPMorgan invest in securities, Dimon replied: We can easily do $200 billion. The risk banks should worry about is high inflation and high rates, he said. Being very liquid protects us. Still, JPMorgan added that Barnum could find some opportunities for a little bit more cash deployment as rates come closer to Barnum’s view.