Banking

Managing excess liquidity getting tougher for banks

Chief Financial Officer James Herzog accentuated the positive about Comerica’s deposit glut before delivering the caveat.

The Dallas company, which reported record levels of deposits in the fourth quarter, is using excess liquidity to buy up securities and pay back $2.8 billion in Federal Home Loan bank advances, Herzog told analysts recently. The moves could provide “a modest lift” to profits, he said — and then warned the gains are expected to be “more than offset” by the drag from falling loan balances and yields on securities.

Banks of all sizes face the same problem: how to deal with an elevated level of deposits when there are so few ways to put the money to work in the pandemic recession, especially on the lending side. While many banks are demonstrating an ability to manage the excess, the task will get harder.

Deposits rose even more than expected at some banks during the fourth quarter, and they’re predicted to keep rising for the foreseeable future. Adding to the uncertainty is the belief that whenever the economy takes a turn for the better, deposits could rapidly flow back out.

“It’s hard to be confident in your asset-liability management decisions when you don’t know what your balance sheet is going to look like 12 months from now,” said Scott Siefers, an analyst at Piper Sandler who covers regional banks.

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Total deposits have been lifted by credit-line drawdowns, federal aid payments and a slowdown in consumer spending — all of which contribute to higher balances in checking and savings accounts held by consumers and businesses.

Deposits at commercial banks soared by $2.16 trillion in the first half of the year and increased modestly over the summer, according to the Federal Reserve Bank of St. Louis. They gained steam again, rising 8.1% to $16.2 trillion at commercial banks between Sept. 30 and Dec. 31.

After reporting upticks in the fourth quarter, a number of banks said they’re preparing for a bigger increase in the first quarter and afterward.

At Citizens Financial Group in Providence, R.I., average deposits in the fourth quarter rose 16% compared to the same quarter in 2019. Zions Bancorp. in Salt Lake City reported a 20.5% year-over-year increase. And Cullen/Frost Bankers in San Antonio and Regions Financial in Birmingham, Ala., each said deposits rose about 25%.

To handle the influx, those companies and others are buying securities, trying to fund new lending efforts or repaying Federal Home Loan bank advances or other borrowings.

Citizens is tackling the issue by lowering rates paid on deposits and pursuing loan-growth opportunities in point-of-sale, education and niche commercial finance, executives told investors during the company’s quarterly earnings call. They expressed confidence in their decision to steer the overflow of liquidity toward new lending niches instead of securities purchases and predicted many new deposits would remain after the economy improves.

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“To me, it’s really terrific that we have this much cash because it prefunds the loan growth and that’s really where we’re targeting,” Chairman and CEO Bruce Van Saun said during the call. “The loan growth will be better than securities growth in our view, and it also allows us to take reasonably aggressive pricing actions to drive some of the balances away. So we’ve got our game plan here.”

Still, Citizens’ net interest margin declined to 2.75% in the fourth quarter. The company is forecasting a margin on 2.8% for full-year 2021 based on expectations of decreasing cash balances.

It’s not all bad news for the industry, according to Mary Beth Sullivan, managing partner of Capital Performance Group, a Washington-based advisory firm for banks. While net interest margins are falling, net interest income has been rising because of the higher volume of deposits over the past several months, she said.

“Banks have strong balance sheets right now, so they can withstand” the increase in liquidity, Sullivan said. “It’s not ideal and it’s not the way banks want to generate earnings — paying nothing on deposits and earning very little on funds — but it doesn’t necessarily create a problem,” she said.

Yet if more federal aid is approved, “a good chunk” very likely will hit balance sheets in the form of deposits, adding even more pressure on banks to manage the cash, Siefers said. And nobody can say exactly when deposits could start to migrate out of banks, making it hard for them to set strategy, Siefers said.

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“The problem with all this is there’s just not a lot of historical precedent for deposits to leave in a meaningful way,” Siefers said. “It sort of seems like the industry will have to grow into it.”

At Wallkill Valley Federal Savings and Loan in New York, deposits are up 22% year over year, a situation that has raised some regulatory eyebrows, President and CEO Michael Horodyski said. The $350 million-asset company is taking a three-pronged strategy to deal with the influx: It is “judiciously buying” securities, trying to make loans and buying into the subordinated debt market, he said.

Even so, he still has about $20 million more in deposits than he’d like to have. But that’s OK for now.

“We’ve been careful not to just spend it down because we do believe it’s going to go back out,” he said. “There’s a lot of pent-up demand for recreational activities and concerts and taking trips, and when those things come back in vogue, we’ll start to see this money get back out in the economy.”


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