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Tuesday, February 16, 2010

Citigroup, BofA, JPMorgan’s Idle Cash Drags on Profitabilty


U.S. lenders, criticized for being too reckless in the past and too stingy in the present, have been sitting on as much as $1.29 trillion in cash, equal to a record 98 cents for every dollar of existing business loans.

The ratio of cash to corporate loans has more than quadrupled from 21 cents in June 2008, according to Jan. 13 Federal Reserve data compiled by Bloomberg. Corporate loans shrank 14 percent to $1.32 trillion during that period as bankers tightened standards to curb record defaults and meet demands by regulators for more liquidity.
Banks are leaving more cash idle amid slack demand from borrowers throughout the economy and concern that regulators will require more liquidity to forestall another financial crisis. That’s crimping profit, and the result may be a drop in returns on equity by about 33 percent from pre-crisis levels, according to analysts at KBW Inc.

“It is a less-sexy business,” said David A. Hendler, senior financial services analyst at CreditSights Inc., who sees banks losing their image as a growth industry on Wall Street. “The master-of-the-universe action-figure banker is now a relic on EBay.”

Cash piled up even as President Barack Obama beseeched bankers to lend more and drive down the 9.7 percent jobless rate. Among the three biggest U.S. banks, the one with the highest ratio of cash to corporate loans is New York-based Citigroup Inc. -- whose biggest investor is the U.S. government with a 27 percent stake.

Cash at Citigroup

Citigroup’s $193 billion in cash and deposits with other banks as of Dec. 31 stood at $1.15 for each dollar of existing corporate loans, which totaled $167 billion, according to data compiled by Bloomberg. That’s double the ratio in June 2008, when cash totaled $113 billion against $222 billion of corporate loans at Citigroup, which ranks third in the U.S. by assets.

JPMorgan Chase & Co., ranked second and based in New York, showed a ratio of $1.08 as of September, the date of its most recent report to the Securities and Exchange Commission of its commercial loan totals.

At Bank of America Corp., the biggest U.S. lender, cash and deposits at other banks tripled to $146 billion, or 64 cents for each dollar of commercial loans at the Charlotte, North Carolina-based bank.

“Generally speaking, our cash balances are higher this year than in previous years as a result of more stringent liquidity requirements that require stable sources of funding,” Bank of America spokesman Jerry Dubrowski said. Loans declined recently “because of lower demand and the fact that some clients are taking advantage of the robust bond markets to manage bank debt levels,” Dubrowski said.

Idle Funds

The lost earnings power tied to idle cash could amount to several billion dollars a year industrywide. If banks were earning 5 percent on the $200 billion of business loans that vanished since June 2008, they would have another $10 billion of annual interest revenue.

Citi’s stash earned 0.6 percent in annualized average interest in the three months through December, while its corporate loans averaged 5.78 percent, the company reported. Based on that difference, if Citigroup lent out $50 billion of its cash -- which would restore its corporate loan book back to its June 2008 size -- the bank would make $2.5 billion more in annual interest revenue.

Lost Profit

The unused cash is a drag on profit, reflecting a shift toward safety by lenders and less demand from borrowers because of the slow economy, said Frederick Cannon, associate director of research at New York-based KBW, which specializes in financial firms. When the economy and finance get back to normal, KBW predicts bank returns on equity will be 10 percent to 14 percent instead of the 18 percent to 20 percent that prevailed in the two decades before the bust.

“Banks have to invest some of their excess liquidity and they have to figure out ways to grow loans,” Cannon said.

Obama prodded leaders of the nation’s biggest banks at a Dec. 14 White House meeting to step up business lending and fuel the economic recovery. On Feb. 2, Obama announced a plan to make $30 billion available for lending through community banks to small firms.

At the same time, lax lending standards have been blamed for creating the financial crisis, with Senate Banking Committee Chairman Christopher Dodd, the Connecticut Democrat, becoming the latest lawmaker to decry banks for “reckless behavior.”

January Record

According to data from the Fed’s bank balance sheets, the ratio of cash to corporate loans reached a record 98 cents on Jan. 13, before declining by three cents the following three weeks. The data, going back to January 1973, when Richard Nixon was president, shows the ratio hovered around 60 cents in the 1970s and then declined over the next three decades to 20 cents.

The figures include actual cash as well as deposits with other banks, mostly within the Federal Reserve system. Corporate loans include commercial debt, such as term loans and revolving lines of credit, while excluding commercial real estate. The ratios of cash to loans are based on Federal Reserve totals of assets and liabilities which banks in the U.S. provide to regulators in so-called “call reports.” The Fed surveys key lenders weekly to update the numbers.

Cash balances and loan portfolios reported to the SEC by the biggest bank holding companies are not exactly comparable to the Federal Reserve data, though the trends are the same, bank spokesmen said. The SEC data from individual banks reflect their consolidated operations, including international cash and loans, while the Fed data is compiled from their U.S. businesses. Some companies also differ in their definitions of cash and their reporting of commercial loan totals.

Shrinking Portfolios

The slack demand makes it harder for banks to put cash back to work as old debts get paid off, said Paul J. Miller, an analyst at FBR Capital Markets and a former bank examiner.

“Their loan portfolios continue to roll off at a very fast pace,” said Miller, whose firm is based in Arlington, Virginia. The slow economy is making companies less inclined to renew loans or take out new ones; a majority of firms in the Standard & Poor’s 500 stock index have increased cash to a combined $1.19 trillion while simultaneously reducing spending, according to data compiled by Bloomberg.

JPMorgan’s customers are using less of their available bank credit lines than in the past, Chief Financial Officer Michael J. Cavanagh said in a Jan. 15 conference call. Commercial and industrial loans at JPMorgan totaled $75 billion compared with $81 billion of cash and deposits with banks at the end of September. Its cash was 63 percent higher and its loan portfolio was 54 percent lower than in June 2008.

Liquidity First

The bank has not yet disclosed its commercial and industrial loan totals for the end of December in SEC filings. Spokeswoman Jennifer Zuccarelli declined to comment.

Citigroup Treasurer Eric Aboaf told bond investors during an Oct. 18 conference that stockpiling cash and reducing loans was creating “a deliberately liquid and flexible balance sheet here at the company.” Spokesman Stephen Cohen declined to elaborate.

Such shifts will likely persist because of regulatory pressure to use less borrowed money and hold more liquid assets, which by nature are less profitable, Miller said. In December, the Bank for International Settlements in Basel, Switzerland, proposed standards that would require bankers to keep enough cash and liquid assets to survive a month-long freeze of capital markets.

“These guys grew up on leverage, and that leverage has been taken away,” Miller said.