Biggest U.S. banks keep assets at safest level in 35 years

The largest banks haven’t been this cautious with their holdings in at least 35 years.

Cash, Treasurys and other securities effectively guaranteed by the federal government now make up more than 35% of the combined balance sheets of the 25 biggest U.S. banks, according to data compiled by the Federal Reserve. That’s the biggest share in records going back to 1985, and is 5.5 percentage points higher than the five-year average.

Loans and leases now account for less than half of big banks’ books for the first time on record, spurred by what appears to be a combination of lower borrower demand and lenders tightening their standards as the coronavirus pandemic drags on. The cautious stance will fuel debate over whether giant firms are prudently guarding against a worst-case scenario or exacerbating the pain by slowing the flow of credit.

“The banks have been flooded with deposits and have nowhere to put it,” said Brian Foran, an analyst at Autonomous Research. “Healthy companies don’t want to borrow because the future is still uncertain. Struggling companies would like to borrow to stay afloat, but as a bank it’s hard lending to those sectors.”

Next week, the largest U.S. banks, including JPMorgan Chase, Bank of America and Citigroup, report their third-quarter financial results. The firms will detail their lending activities over the past three months, and investors will be listening for executives’ commentary on how their customers are faring during the COVID-19 crisis.

The KBW Bank Index has slumped 30% this year, fueled by Citigroup’s 44% decline and Wells Fargo’s 53% drop. The S&P 500, meanwhile, has gained 6.7%.

Hopes that U.S. economic growth would quickly rebound following widespread shutdowns in the spring have largely faded, with economists not expecting a turnaround until the second quarter of 2021, estimates compiled by Bloomberg show.

The pullback in lending comes despite some $525 billion in forgivable small-business loans under the federal Paycheck Protection Program, launched in response to the pandemic. Had the banks kept the mix of loans to securities and cash they’ve had in the past five years, the flood of deposits would have meant an extra $635 billion of loans for consumers and businesses, the figures suggest.

Bankers say that businesses have less need for credit, whether in the form of commercial and industrial loans or commercial real estate financing, according to the latest comprehensive survey of banks’ senior loan officers. Households have been clamoring for home mortgages, loan officers said, but there’s less demand for other forms of financing, such as credit cards and auto loans.

Stricter lending

When compared with the range of lending standards that have prevailed since 2005, the heyday of lax mortgage requirements, most large banks told the Fed they’re stricter now in doling out credit to all types of borrowers, with few exceptions. Almost half of large banks surveyed said that they’re about as restrictive as they’ve ever been in the past 15 years when it comes to providing credit cards to subprime borrowers.

PNC Financial Services Group Chief Executive William Demchak told investors last month that his bank’s lending probably would fall by close to 5% in the third quarter from the previous three months, a far steeper drop than the roughly 1% decline he predicted in July.

More than 800,000 Americans have filed for initial unemployment benefits every week since March, nearly quadruple the weekly average in the previous five years, according to the Labor Department.

Almost a quarter of Americans expect someone in their household to experience a pay cut within four weeks, while nearly a third say it’s been difficult to pay for usual household expenses, according to the latest Census Bureau survey.

Deposit surge

Since the end of February, the largest banks’ balance sheets have expanded by $1.3 trillion, thanks to a flood of deposits and an ongoing Fed campaign to buy government-backed bonds, mostly through the largest lenders. The banks in turn have channeled that money into growing their stockpile of cash and government-backed securities by $1.1 trillion.

At Zions Bancorp., there’s been virtually no increase in lending aside from forgivable loans to small businesses under the Paycheck Protection Program, Zions President Scott J. McLean said at an industry conference last month.

“I’m not going to apologize for our loans being flat to down,” he said. “There’s obviously limited economic activity.”