Here is a complicated issue. Are consumers and businesses saving too much cash? I’d say you can never squirrel too much money away, but it looks like that might be an issue for deposit accepting institutions.
Today’s WSJ covers the shift in savings by businesses following COVID.
- U.S. companies are holding on to billions of dollars in cash. Their banks aren’t sure what to do with it.
- When the coronavirus pandemic hit last year, corporate executives rushed to raise money. Unfortunately, banks have been holding that cash ever since, and because companies are reluctant to borrow from them, they can’t turn it into income-generating loans.
- That has weighed on banks’ profit margins, and some have started pushing corporate customers to spend the cash on their businesses or move it elsewhere.
- Bankers say they thought the improving economy would reduce companies’ desire for holding cash, but deposit inflows have continued in recent weeks. Chief financial officers and treasurers, many still wary of the pandemic’s impact, say they aren’t ready for big changes, even if they earn little or nothing on their deposits.
The WSJ provides a chart on Total Deposits in U.S. commercial banks; it illustrates the cash movement into deposits. For example, on March 4, 2020, U.S. savings deposits at commercial banks grew to $13.48 trillion. On May 19, 2021, the metric rose nearly 50% to $17.10.
- High deposits usually aren’t a bad thing for banks, as long as they can use the money to make loans. But bank lending has been slow as many companies prefer to borrow money from investors. For banks, total loans equaled 61% of all deposits as of May 26, down from 75% in February 2020, according to the Fed data.
- According to the Federal Deposit Insurance Corp, the industry net-interest margin, a key measure of lending profitability, fell to a record low in the first quarter.
The WSJ does not present consumer savings rates, but the Fed tracks the number here. In March 2020, the U.S. consumer savings rate grew to 12.9% from COVID-worried consumers. Two months prior, in January 2020, the savings rate was 7.6%, on par with the prior year. In the latest reported numbers, reported for April 2021, the consumer savings metric rose to 14.9%
Three takeaways here.
- In managing 2021 credit policy forecasts, expect slow, steady portfolio buildups. Revolving debt has been hovering under the pre-covid peak of $1.1 trillion for a year. In the latest reported numbers, the metric stands at $963.7 billion. Mercator expects this number will approach the peak in mid-2022, but it will be slow, steady growth, not a rapid buildup.
- Slow build up bears well for credit losses, and while the current charge-off rate increased slightly to 2.95% in Q12021, the number is still relatively low and will likely normalize in 2022 around 3.5%
- The Asset-Backed Securitization market will be slower through 2022, as credit card issuers will use deposits to fund credit card investments since high savings will be cheaper than Wall Street Rates.
The short story: Savings levels are up for consumers and businesses. It might be bad news for some banks, but it sure feels good to have money in the bank.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group