As Yields Rise, Some US Banks Shift Cash Into Treasuries

JPMorgan Chase CEO Jamie Dimon speaks at the 2019 North American Building Trades Unions (NABTU) Legislative Conference in Washington, United States, April 9, 2019. REUTERS / Jeenah Moon / File Photo

Oct. 14 (Reuters) – Some major U.S. banks are buying more U.S. government securities as yields start to rise and the Federal Reserve appears poised to cut its bond buying program – a balance sheet change which, according to analysts, could increase bank profits by several percentage points depending on how they play their hands.

Bank of America Corp (BAC.N) and Citigroup Inc (CN) said Thursday they recorded additional net interest income in the quarter by purchasing higher yielding securities.

JPMorgan Chase & Co, however, (JPM.N) said on Wednesday it continued to accumulate liquidity, expecting rates to rise as predicted by chief executive Jamie Dimon.

Citigroup CFO Mark Mason said the bank had bought treasury bills and mortgage-backed securities.

“We have a strong liquidity position and we’ve put some of it to good use,” Mason told reporters.

Bank deposits have piled up more than ever, fueled by money from Federal Reserve bond purchases, government stimulus payments and consumer savings. Meanwhile, banks’ net interest income on securities and loans, a key source of income, plummeted as the Fed kept rates low and borrowers repaid their loans.

How the nation’s largest lenders manage this mix of cash and securities on their balance sheets will help separate the winners from the losers in the coming quarters, as uncertainty grows over the outlook for inflation and interest rates. interest, analysts said.

The typical big bank could increase its profits before loss and tax provisions by 7% by investing its excess liquidity at 1.5%, estimated Barclays analyst Jason Goldberg.

Goldberg said it was too early to say whether a slight increase in securities purchases by some banks signaled a new industry trend.

Predicting returns and managing interest rate risk are among the biggest challenges for bankers. If they buy securities to earn more interest now, they risk missing out on even higher returns, with securities that have lost value.

The yield on 10-year Treasuries has been on a roller coaster ride this year as views on Fed policy and inflation have shifted. After climbing to 1.75% from 0.9% in the first three months of the year, it fell 1.15%. JPMorgan’s Dimon predicted in July that it would drop to 3%. The yield was 1.51% Thursday night.

The changing outlook for higher yields and increased lending has boosted bank stocks this year. The KBW Bank Index (.BKX) is up 39% year-to-date, double the gain of the S&P 500. (.SPX)

Wells Fargo & Co (WFC.N) added headlines in the first half of this year, but recently stepped back to prepare for higher rates, CFO Michael Santomassimo told reporters on Thursday.

Bank of America has been particularly aggressive in investing its cash in securities, nearly doubling the portfolio in the past year. Debt securities rose to 36% of earning assets in the quarter, from 22%.

In contrast, JPMorgan has kept its stocks stable around 18% of its assets because it has stored cash. Read more

During the third quarter, JPMorgan retained $ 757 billion in cash against $ 565 billion in securities.

“Our position here hasn’t really changed,” JPMorgan CFO Jeremy Barnum told reporters. “We still believe in a robust recovery. We still believe that comes with higher rates.”

Dimon, when asked by analysts about how much money JPMorgan could invest in securities, said, “We can easily make $ 200 billion.”

One risk that banks should be concerned about, he said, is high inflation and high rates. “Being very liquid protects us.”

Still, Barnum added that as rates move closer to JPMorgan’s opinion, the bank may find “opportunities for a bit more cash flow.”

Reporting by David Henry and Elizabeth Dilts Marshall in New York and Noor Zainab Hussain in Bengaluru; Editing by David Gregorio

Our Standards: Thomson Reuters Trust Principles.


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