US Banks: what to do with all that cash

NII appears to be bottoming across the sector as NIM pressure from low rates eases and surging deposit growth drives bigger balance sheets and some remixing of cash into securities. With loans still disappointing and the economic outlook uncertain, Bernstein takes a closer look at one potential upside driver for NII—banks’ large reserves of cash at the Fed that have risen by 100%+ following an ongoing influx of deposits. Banks have parked a sizable portion of new deposits as low-yielding cash at the Fed and have lots of flexibility to deploy it into securities (as rates rise) or loans (if demand returns) over time. Bernstein: "We show that deploying excess cash into securities at a 1% incremental yield could lift the average bank’s EPS by 4.9%. Even if deposit growth continues into 2021 at half of last year’s pace and banks deploy all the new growth at a 1% incremental yield, EPS would be helped by an additional 6.3%. Combining the two illustrations shows that in this relatively optimistic scenario, banks could boost EPS by ~11% by deploying current and inflowing excess cash at incremental yields"