The largest U.S. banks are pursuing dramatically different strategies to place their trillions of dollars in deposits in the public debt market, highlighting the Wall Street debate over interest rates.
Bank of America, on the one hand, is the second-largest U.S. donor in terms of assets, raising interest rates from its third-quarter security portfolio to increase its third-quarter revenue, which grew 77 percent last year and now stands at about 70 970.
The largest U.S. bank, on the other hand, is JPMorgan Chase, which sits on an investment securities portfolio that is small in size and tends to keep deposits in the Federal Reserve rather than wasting them in potentially overvalued treasury or agency securities.
Different strategies have added a controversial note to an earnings season where top banks benefited from a dealmaking boom on Wall Street এবং and the Covid-1 pandemic epidemic could help determine which nder is more profitable.
“You see banks adopting different strategies around managing their balance sheets and interest rates,” said Jason Goldberg, a bank analyst at Barclays. “Time will tell which one is more suitable than the other.”
Banks are struggling to use all the deposits on their balance sheets as government stimulus and quantitative easing programs are introduced during the health crisis.
Money laundering will be their preferred option. But loan growth has slowed as companies have found sufficient liquidity in the bond market and consumers have paid down on credit cards.
Buying treasury or mortgage-backed securities gives banks some results but carries other risks. If rising inflation leads to higher rates, they need to mark the value of their bonds in their “available for sale” portfolio and they will miss the opportunity to use their cash to leverage their profits.
BofA responded by speeding up its bond purchases last year, and the move paid off nicely in the third quarter. Despite a decline in loans per cent, it said on Thursday that net interest income rose 10 per cent – a 1 per cent increase in JP Morgan and a 1 per cent and 5 per cent decline in Citigroup and Wells Fargo, respectively.
“If banks are struggling to generate loans, it means they have to exploit more securities,” said Mark Cabana, head of U.S. rate strategy at BOFA. “There is expected to be an ongoing, very strong bank bid for the Treasury.”
In contrast, JPMorgan increased the size of its debt protection portfolio by 3 percent last year. At Citigroup and Wells Fargo, the growth was 14 percent and 12 percent, respectively.
JPMorgan CEO Jamie Damon has made it clear that he fears Treasury prices may fall. In his April letter to shareholders, he said, “It is difficult to support the value of US debt.” A few months ago, he said he “wouldn’t touch [Treasuries] With 10-foot poles. “
The bank’s chief financial officer, Jeremy Burnham, said Wednesday that it was “happy to be patient” with its extra deposits but is likely to start investing more soon.
Wells Fargo has also indicated that it is willing to wait. Banks began buying more debt securities in the first half of the year, but moved away as rates began to rise. Compared to the second quarter, its investment portfolio remains stable.
“It simply came to our notice then. . . There is a risk of a side-up for the near-term rate, and so we think we will have a better chance of deploying as we wait, ”Chief Financial Officer Mike Santomasimo told reporters.
Such warnings have been costly in a short time. According to Goldberg of Barclays, JPMorgan and Wells Fargo could increase their pre-provision earnings by 5 per cent and 5 per cent, respectively, if they invest 1.5 per cent of their surplus cash.
But if rates are high, treasuries could be favorable to banks, creating a negative feedback loop in the market.
Genadia Goldberg, senior US rate strategist at TD Securities, said: “As the rates rise, so does the risk. Their nding business is much more attractive and they have bought less treasury.” “So I think the risk is actually for the Treasury market.”
Additional report by Joshua Franklin in New York