Some banks are deploying excess cash by the billions, while others are waiting to see if loan growth will return and deposits run off as the economy recovers.
Excess liquidity from multiple stimulus payments, Paycheck Protection Program loans and lower spending weighed on banks' margins in first-quarter 2021 earnings. Many CEOs said on earnings calls that they anticipate higher levels of liquidity to stick around long-term, but some were hopeful that the deposits could be used as funding for increased lending expected in the second half of 2021.
William Demchak, chairman, president and CEO at Pittsburgh-based The PNC Financial Services Group Inc. referred to higher levels of liquidity as a "structural change in banking," with higher securities balances lasting "for an extended period of time." PNC has about 20% of its interest-earning assets in securities and anticipates that to rise to between 25% and 30% by year-end.
Several of the industry's larger banks said they have already increased, or have plans to grow, their securities holdings by billions of dollars. Bank of America Corp. increased its debt securities by $172 billion from the end of 2020, and its liquidity portfolio is over $1 trillion, or more than one-third of its total balance sheet, management said.
Cincinnati-based Fifth Third Bancorp's management said it would deploy approximately $10 billion of its additional liquidity into its investment portfolio "over a period of time."
Management at Cleveland-based KeyCorp said the bank had placed about $5 billion in short-term treasuries over the last two quarters, which are receiving an average yield of about 40 basis points.
"That's fairly low," said CFO Donald Kimble on the call. The bank is maintaining about $15 billion in cash, whereas its target is between $1 billion and $2 billion.
Columbus, Ga.-based Synovus Financial Corp. increased its securities book by $1 billion, said CFO Andrew Gregory on the bank's call. "Securities accounted for approximately 16% of total assets at the end of the quarter, and we continue to expect further growth within that portfolio for the foreseeable future to deploy excess liquidity," Gregory said.
But not every bank is using the excess cash for securities. Banks are hesitant to tie up too much funding in a low-rate environment with loans anticipated to pick back up later in 2021.
"That securities book will help you short-term in NII, but you will pay for that dearly down the road, and we're playing for the long game," said David Turner Jr., CFO at Birmingham, Ala.-based Regions Financial Corp. "We're not about trying to generate short-term NII growth for that sake."
New York City-based Signature Bank is anticipating using its extra cash for a mix of loan funding and securities purchased. Bank management said on its first-quarter earnings call that it anticipates between $8 billion and $16 billion in new loans and securities purchases, with the amount split about evenly between the two. The bank grew its securities portfolio by about $2.1 billion in the first quarter.
Chicago-based First Midwest Bancorp Inc. was able to use its excess liquidity to fund mortgage loan production, which accounted for much of the bank's $100 million loan increase in the first quarter.
"And we also look to be able to deploy liquidity in something that doesn't crush our margin. Hopefully, we'll continue to see higher-yielding opportunities on the securities side, but we'll continue to look for other asset acquisitions, of loan acquisitions to help supplement," said CFO Patrick Barrett on the call.
Several bankers said they expect excess liquidity to drag the industry's margins for some time to come. Management at Memphis, Tenn.-based First Horizon Corp. said the bank has about $10 billion in excess deposits. While the bank anticipates excess balances will decline as loan balances grow, commercial clients spend their excess cash and stimulus checks are spent on the consumer side, normalization will take some time.
"I think it's going to be huge for a while," said CFO William Losch on the call.
Several banks have reported detail on the effects of excess cash. Knoxville, Tenn.-based SmartFinancial Inc. reported excess cash negatively impacted the bank's net interest margin by 20 basis points. Conway, Ark.-based Home Bancshares Inc. (Conway AR) reported excess liquidity was 16 basis points dilutive to its NIM. Gulfport, Miss.-based Hancock Whitney Corp. said its excess liquidity totaled about $2.5 billion. Bankers across the industry are weighing their options on how to deal with the excess cash.
"It's going to be a fight," said Harold Carpenter, CFO and principal accounting officer at Nashville, Tenn.-based Pinnacle Financial Partners Inc. on the bank's first-quarter earnings call. "It will be a war to try to drain some of this liquidity."