By Nina Trentmann and David Benoit
U.S. companies are holding on to billions of dollars in cash.
Their banks aren't sure what to do with it.
When the coronavirus pandemic hit last year, corporate
executives rushed to raise money. Banks have been holding that cash
ever since, and because companies are reluctant to borrow from
them, they can't turn it into income-generating loans. That has
weighed on banks' profit margins, and some have started pushing
corporate customers to spend the cash on their businesses or move
it elsewhere.
Bankers say they thought the improving economy would reduce
companies' desire for holding cash, but deposit inflows have
continued in recent weeks. Chief financial officers and treasurers,
many still wary of the pandemic's impact, say they aren't ready for
big changes, even if they earn little or nothing on their
deposits.
"We have been operating with a higher cash balance for about 12
months now," said Matthew Ellis, the chief financial officer of
telecommunications company Verizon Communications Inc. "There's
been no decision yet if and when to bring it down." Verizon held
$10.2 billion in cash and cash equivalents at the end of the first
quarter, up 45% from a year earlier.
Pascal Desroches, who manages the finances of rival AT&T
Inc., said the company doesn't plan to move its cash holdings into
other investments to generate a higher return. "We are not looking
to optimize the yield," he said.
Companies flooded U.S. banks with deposits at the start of the
pandemic. In March 2020, the Federal Reserve lowered interest rates
to near zero and launched bond-buying programs, which enabled many
companies to raise funds at low costs. The Treasury Department also
made loans, including to airlines.
Bank deposits have continued to surge this year. Between late
March and May 26, they rose by $411 billion to $17.09 trillion,
according to the latest available data from the Federal Reserve.
That is slower than the pace last spring, but still nearly four
times the average of the past 20 years, according to the Fed
data.
High deposits usually aren't a bad thing for banks, as long as
they can use the money to make loans. But bank lending has been
slow as many companies prefer to borrow money from investors. For
banks, total loans equaled 61% of all deposits as of May 26, down
from 75% in February 2020, according to the Fed data.
The industry net-interest margin, a key measure of lending
profitability, fell to a record low in the first quarter, according
to the Federal Deposit Insurance Corp.
Some banks are encouraging corporate customers to consider
alternatives. "Banks would certainly like to do different things,
obviously," said Peter Mariani, CFO of Axogen Inc., a company
specializing in nerve-repair research. "But we're going to maintain
our...conservative investment strategy with our cash."
Top of mind for many big banks is a rule requiring them to hold
capital equivalent to at least 3% of all assets. Worried about the
rule's impact during the pandemic, the Fed changed the calculation
in 2020 to ignore deposits the banks held at the central bank, but
ended that break this March. Since then, some banks have warned the
growing deposits could force them to raise more capital, or say no
to deposits.
"Raising capital against deposits and/or turning away deposits
are unnatural actions for banks and cannot be good for the system
in the long run," Jennifer Piepszak, then-CFO of JPMorgan Chase
& Co., said on a call with analysts in April.
Banks have several options for unloading client deposits, though
they try not to offend their customers in the process.
One strategy is reverse tiering, giving clients lower yields for
additional deposits. Asking customers to move some funds to
another, smaller bank also is an option, said Pete Gilchrist, an
executive vice president at Novantas Inc., which advises banks.
"We've been very successfully working with our clients to
basically explore and move some of those nonoperational deposits,"
said Emily Portney, CFO at Bank of New York Mellon Corp.
In recent months, banks including BNY Mellon have focused on
moving clients from deposits into money-market funds, which are
common cash-like investments. Assets in money-market accounts, even
ones run by the same bank, are treated differently under bank
capital rules, alleviating some of the regulatory pressure.
Flows into U.S. money-market funds have surged in recent months,
pushing the total assets held in such funds to $4.61 trillion, just
shy of the record set in May 2020, according to the Investment
Company Institute.
The money-market funds, in turn, need new places to park all
that new cash and earn some interest. But rock-bottom interest
rates have pushed them into storing it back at the Federal Reserve
overnight, in a facility that pays them zero return and had been
largely ignored for the past three years. Funds stored overnight
with the Federal Reserve Bank of New York surged in May and hit a
record of $497.4 billion on Tuesday.
Finance chiefs say holding on to cash is sensible, for now.
"Having a bit more cash than you normally would still makes good
business sense now as we aren't really out of the pandemic yet,"
said Jeff Shepherd, the CFO of Advance Auto Parts Inc., which is
based in Raleigh, N.C.
--Kristin Broughton and Mark Maurer contributed to this
article.
Write to Nina Trentmann at Nina.Trentmann@wsj.com and David
Benoit at david.benoit@wsj.com
(END) Dow Jones Newswires
June 09, 2021 07:44 ET (11:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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