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As yields rise, some U.S. banks shift cash to Treasuries

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Oct 14 (Reuters) – Some massive U.S. banks are shopping for extra U.S. authorities securities as yields begin to rise and the Federal Reserve seems prepared to taper its bond-buying program – a steadiness sheet shift that analysts say might enhance financial institution earnings by a number of proportion factors relying on how they play their fingers.

Bank of America Corp (BAC.N) and Citigroup Inc (C.N) on Thursday mentioned they’d picked up further web curiosity income through the quarter by shopping for securities with increased yields.

JPMorgan Chase & Co, nevertheless, (JPM.N) mentioned on Wednesday that it continues to hoard cash, anticipating charges to transfer increased as Chief Executive Jamie Dimon predicts.

Citigroup Chief Financial Officer Mark Mason mentioned the financial institution has been shopping for Treasuries and mortgage-backed securities.

“We’ve got a strong liquidity position and we’ve been putting some of that to work,” Mason advised reporters.

Bank deposits have piled increased than ever, fueled by cash from Federal Reserve purchases of bonds, authorities stimulus funds and financial savings from shoppers. Meanwhile, financial institution web curiosity income from securities and loans, a key supply of earnings, has plummeted because the Fed saved charges low and debtors paid off loans.

How the nation’s largest lenders handle that blend of cash and securities on their steadiness sheets will assist separate winners from losers in coming quarters, as uncertainty grows over the inflation and rate of interest outlook, analysts have mentioned.

The typical massive financial institution might get a 7% enhance to its earnings earlier than loss provisions and taxes by investing its extra cash at 1.5%, analyst Jason Goldberg of Barclays estimated.

Goldberg mentioned it was too early to say if an uptick by some banks in securities purchases signaled a brand new business pattern.

Predicting yields and managing rate of interest danger is among the many largest challenges for bankers. If they purchase securities to earn extra curiosity now, they danger lacking out on even increased yields, left with securities which have misplaced worth.

The yield on 10-year Treasuries has been on a curler coaster this yr with altering views of Fed coverage and inflation. After climbing to 1.75% from 0.9% within the first three months of the yr, it fell again 1.15%. JPMorgan’s Dimon predicted in July that it might go to 3%. The yield was at 1.51% late on Thursday.

The altering outlook for increased yields and extra lending has pushed financial institution shares this yr. The KBW Bank Index (.BKX) is up 39% year-to-date, twice the achieve of the S&P 500.(.SPX)

Wells Fargo & Co (WFC.N) added securities within the first half of this yr, however has stepped again lately to be prepared for increased charges, Chief Financial Officer Michael Santomassimo advised reporters on Thursday.

Bank of America has been particularly aggressive in investing its cash in securities, practically doubling the portfolio over the previous yr. Debt securities rose to 36% of incomes property within the quarter from 22%.

In distinction, JPMorgan has saved its securities regular round 18% of property because it has stockpiled cash. learn extra

During the third quarter JPMorgan saved $757 billion of cash in contrast with $565 billion of securities.

“Our position here hasn’t really changed,” JPMorgan CFO Jeremy Barnum advised reporters. “We are still believe in a robust recovery. We still think that comes with higher rates.”

Dimon, when requested by analysts how a lot cash JPMorgan might put into securities, mentioned: “We can easily do $200 billion.”

A danger banks ought to be fearful about, he mentioned, is excessive inflation and excessive charges. “Being very liquid protects us.”

Still, Barnum added that as charges come nearer to JPMorgan’s view the financial institution might discover “some opportunities for a little bit more deployment of cash.”

Reporting by David Henry and Elizabeth Dilts Marshall in New York and Noor Zainab Hussain in Bengaluru; Editing by David Gregorio

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