Nearly 18 months after a surge in deposits at the start of the pandemic, customers are still pouring money into banks, defying expectations about the stickiness of the excess cash.
The swell — which began as corporations drew down credit lines and the federal government dispersed emergency stimulus aid — continues despite the fact that COVID-19 vaccines are plentiful, consumers are once again spending money, and the economy is rebounding.
While the rise in deposits may offer certain opportunities, a growing number of banks are making peace with the likelihood that at least a portion of the excess liquidity could become a long-term fixture on their balance sheets, leading to even more pressure on margins that are also being squeezed by low interest rates.
“We’re all just sort of sitting on this excess, and it’s not a lot of fun right now,” said Scott Siefers, an analyst at Piper Sandler.
While the pace of the inflow slowed in the second quarter, deposits at U.S. commercial banks rose by nearly $300 billion between April and June, Federal Reserve data shows.
Since January 2020, total deposits at U.S. commercial banks have climbed by 30.4%, according to data compiled by the Federal Reserve Bank of St. Louis. As of July 28, the latest date for which information is available, deposits were at a record $17.3 trillion.
Bankers are trying to make
At Regions Financial in Birmingham, Alabama, more than $30 billion of deposits have flowed into the $155.6 billion-asset company since early 2020. Between 20% and 30% of those deposits are expected to “persist on the balance sheet,” Chief Financial Officer David Turner told analysts during the company’s second-quarter earnings call.
How quickly any of it runs off depends on a lot of unknown factors, Turner said.
“If in fact the economy continues to rebound, and we get the virus under control, and we start seeing GDP growth and people putting their cash to work, then maybe we see it run out a little faster,” Turner said. “It’s just really, really hard to tell.”
At M&T Bank in Buffalo, New York, “deposits are probably going to stick around a little bit longer” than expected, Chief Financial Officer Darren King said last month. As such, the bank, which has $150.6 billion of assets, is trying to figure out how best to optimize the cash, he said.
The deposit glut at banks was initially expected to be a relatively short-term phenomenon. But individuals who received stimulus checks and businesses that received Paycheck Protection Program loans have not spent down the cash
At the same time, loan demand has not returned to pre-pandemic levels. “This did not pan out as we anticipated,” Siefers said.
Total loans and leases surged in April and May of 2020 due in part to increased line utilizations, but they declined through late 2020 and have been mostly flat in the eight months since.
When loan demand does return, there will be no shortage of capital to fund those requests. But in the meantime, banks have to figure out how to put the money to work. “There’s the saying, ‘Pain today for payoff tomorrow,’” Siefers said.
KeyCorp in Cleveland, which is sitting on about $20 billion of excess liquidity, has been thinking about buying more securities, but has not made any decisions about when that will happen, Chief Financial Officer Donald Kimble told analysts last month.
Much depends on the direction of interest rates, he said.
“We’re still looking for opportunities,” Kimble, who is also vice chair of the $181.1 billion-asset company, said during the company’s quarterly earnings call. “But we do expect rates over the next several quarters to start picking up again, and [give] us some opportunities to buy there.”
The company expects deposits to keep arriving, surpassing 2020 levels by high single-digits, Kimble said.
At Financial Institutions in Warsaw, New York, the downsides of excess deposits are being offset by certain benefits, Chief Financial Officer Jack Plants said in an interview last week.
“In the grand scheme of things, when we look at our liquidity profile, we have a very strong, stable core deposit base and that’s something we can lean on for sustainable growth in our loan book,” he said.
The parent company of Five Star Bank — which normally keeps about $40 million to $50 million at the Federal Reserve — has taken a three-pronged approach to its excess liquidity. Some of the funds were used to pay back Federal Home Loan Bank advances, some of them have been used to buy securities, and about $155 million is sitting at the Fed.
The $5.3 billion-asset Financial Institutions has been cautious about deploying more excess cash into securities. It doesn’t want to risk tying the money up too long, Plants said.
That stance is familiar. While community banks often deploy their excess liquidity in some fashion, the duration of investment funds and the future of interest rates can make such investments feel like a trap, said Neil Stanley, CEO of The CorePoint, a consulting firm in Omaha, Nebraska, that helps banks collect deposits at low prices.
The thinking is, “I have all these deposits and I could make money by investing on the yield curve … but how far should we go? So you go a little bit and a little bit more,” Stanley said.
At Chemung Financial in Elmira, New York, deposits are currently 36% higher than in early 2020.
The stickiness has surprised President and CEO Anders Tomson, who thought the excess cash would be put to use more quickly by consumers and businesses. The $2.4 billion-asset parent company of Chemung Canal Trust Co. is “still making money through the securities book and trying to put the money to use any way it can,” but margin pressure is growing, Tomson said last week.
“A year ago I said I would be patient,” Tomson said, referring to how long it might take for the high level of deposits to run off. “In reflection, I am extremely patient.”
