Banks' Surging Cash Holdings Indicative Of Future Writedown Concerns
In a note earlier, JPMorgan expressed its concerns at the burgeoning cash balances held by banks which anticipate major writedowns in the future, and are fortifying themselves appropriately. "Key changes seen thus far in 4Q for large banks are the slowdown in growth in securities and the large 28% qoq increase in cash, while loans continue to decline at a little faster rate led mainly by C&I loans and also to some extent residential mortgages. We expect this shift will hurt net interest income into 2010." When the worm turns, look for this cash to evaporate promptly as massive upcoming losses need to be funded, and as equity raises will be out of the question, banks better pray they have enough cash in store for the really rainy days. Also, somehow the term "Too Big To Fail" was lost in translation, and according to JPM is now defined as "Flight To Quality."
More forward looking observations: "Looking ahead, we expect credit card oriented banks to be better positioned whereas banks with greater proportion of commercial-related loans will be little more pressured by faster decline in loans and shift in composition of foreclosure-related expenses to greater share from construction/land versus residential mortgages. These items are likely to pressure core earnings (excluding securities and one-time gains) relatively more at regional banks, because the larger banks would have partial offset to this increased pressure from reduced credit card losses."..With the increased earnings pressure on the weaker regional banks and recent relative outperformance by these banks, we prefer the “flight to quality” banks, which we think provide better
upside with lower risk than the weaker quality regionals.
Yet the biggest highlight is the expansion in cash holdings:
Midway through 4Q, cash has grown the fastest of all assets, up about 28% qoq on average to 9% of total assets at large banks. Securities growth has slowed sharply, flattish qoq excluding unrealized losses vs. 2-3% qoq growth in each of the last two quarters. Loans continue to shrink at the same pace, down 3% qoq (ex Fed Funds & reverse repos), led by continued large decline in C&I loans at about 6.5% qoq on average and 4.5% decline in resi mortgages. Deposits are flattish but with a positive mix shift with growth in non-CD deposits offsetting sharp further decline in CDs. All these growth rates are unannualized.
And some additional warnings, this time focusing on REO losses, which will only become visible once foreclosure moratoria finally unleash the dam of witheld available housing.
Stealth credit costs, i.e., foreclosure (REO) related expenses, are likely to continue to accelerate – they rose 45% qoq on average, up much faster than in prior quarters and added about 30 bp to net chargeoff ratios on average among our banks. The composition of REO is also shifting to increase in proportion of construction and land (albeit still at lower level) versus little decline in share of residential mortgages.
The charts below indicate just how terrified banks are of the unknown and their corresponding desire to build record cash buffers as financial institutions are well aware that you can only extend and pretend so long before you have to pay the piper.