June 26 (Bloomberg) -- Cullen/Frost Bankers Inc. Chairman
and Chief Executive Officer Dick Evans knows why Ben S. Bernanke
is having so much trouble pulling the economy out of its worst
financial calamity since the Great Depression.
Deposits at the San Antonio-based bank are growing a record
20 percent this year while loans shrink for the first time since
mid-2007. Business owners are “being extremely cautious,” said
Evans, who is pumping depositors’ money into Treasuries and
municipal bonds.
Evans isn’t alone. Commerce Department data show that as
the economy slows, Americans are hoarding cash at the fastest
rate in 15 years while commercial and industrial loans have
fallen 8.2 percent since peaking in October, according to the
Federal Reserve. About 60 percent of banks said requests for
business loans dropped in the first quarter, a Fed survey shows.
Banks are putting their cash into the bond market, with
holdings of Treasuries and debt of Fannie Mae and Freddie Mac
rising 14 percent to $1.27 trillion in the week ended June 10
from a year earlier, the Fed says. As recently as January, bond
holdings were up 18 percent, the most since the Fed began
tracking the data in 1973.
“Economic activity is likely to remain weak for a time,”
Fed Chairman Bernanke and his colleagues on the Federal Open
Market Committee said in a statement this week as they left the
target interest rate for overnight loans between banks unchanged
at a record low of between zero and 0.25 percent. “The recovery
really hasn’t got going,” billionaire investor Warren Buffett
said in a Bloomberg Television interview on June 24.
Record Sales
Yields on 10-year Treasury notes fell 21 basis points this
week, to 3.58 percent, at the same time that the government sold
a record $104 billion of debt. The U.S. may issue $3.25 trillion
of securities in the year that ends Sept. 30 to finance stimulus
plans, according to Goldman Sachs Group Inc.
Companies are also selling record amounts of bonds, raising
$751 billion so far this year, 22 percent more than in the same
period of 2008, according to data compiled by Bloomberg.
The biggest bond investors say the economy won’t return
anytime soon to the 4.8 percent growth recorded before credit
markets seized up in the third quarter of 2007. President Barack
Obama’s administration forecasts that the unemployment rate will
likely exceed 10 percent in coming months, the highest since
1983.
‘Potential Growth’
Mohamed El-Erian, the CEO of Newport Beach, California-
based Pacific Investment Management Co., which managed $756
billion as of March 31, says by this time next year, “the
market will realize that potential growth for the U.S. is no
longer 3 percent, but is 2 percent or under.”
The Washington-based World Bank said June 22 that the
global economy will contract 2.9 percent this year, compared
with a previous forecast of a 1.7 percent decline.
Using deposits to buy bonds instead of making loans is
“probably not good news for the growth of the economy in
general,” said Steven Major, the global head of fixed-income
research at London-based HSBC Holdings Plc. “Every government
bond they buy means it’s less money they can lend into the real
world.”
Savings Rate
The consumer savings rate is rising as Americans grow more
concerned about losing jobs and the economy slows. Gross
domestic product contracted 5.5 percent in the first quarter,
the government said yesterday.
Household savings increased to 6.9 percent in May, the
highest since December 1993, the Commerce Department said today.
Deposits grew 7.4 percent faster than loans last year, the
widest gap since 1978, according to Melissa Roberts, an analyst
at KBW Inc., a securities firm in New York.
At the 30 lenders that control about two-thirds of the
country’s banking assets, deposits reached $3.96 trillion as of
June 10, up 16 percent from $3.43 trillion in May 2008, Fed data
show. The institutions, which each have at least $40 billion in
assets, held $787 billion of Treasuries and agency debt, 21
percent more than in May 2008, according to the Fed.
Bond purchases may temper a rise in borrowing costs as the
government sells debt to finance a record $1.8 trillion budget
deficit, according to Major.
Mortgage Help
Combined with the $1.45 trillion committed by the Fed to
buy housing debt this year, bank purchases have helped suppress
mortgage rates by supporting the price of mortgage-backed bonds
guaranteed by Fannie Mae and Freddie Mac, according to Michael
Love, a financial institutions analyst with Moody’s Capital
Markets Research Group in New York.
Rates on 30-year fixed-rate mortgages averaged 5.18 percent
this year, compared with 5.92 percent in 2008, according to
Bankrate.com in North Palm Beach, Florida.
Investors in Treasuries have lost 4.6 percent this year,
compared with a return of 14 percent in 2008, according to
Merrill Lynch & Co. indexes. Agency debt has lost 0.74 percent,
while state and local government debt has gained 7 percent.
Banks have looked to the debt market during economic
slowdowns to build up cash by investing in tradable securities
with the least credit risk, while waiting for interest rates and
loan demand to increase, said Richard Spillenkothen, the Fed’s
lead banking regulator from 1991 to 2006. He’s now with Deloitte
& Touche LLP in New York.
Last Recession
During the last recession, from March to November 2001,
banks’ government debt holdings rose 4.84 percent to $1.3
trillion, according to data compiled by Bloomberg.
Lenders with funds to put to work are torn between keeping
money in short-term securities so they can re-invest it when
interest rates rise, and trying to boost earnings by buying
longer-term, higher-yielding debt, said S.J. Guzzo, who advises
bank clients on fixed-income portfolio strategies for St.
Petersburg, Florida-based brokerage Raymond James Financial Inc.
“It’s a real conundrum for them because they’re having to
stay short for liquidity or cash flow knowing that rates are
going to rise at some point in the future, yet the problems in
the loan portfolio cause pressure on earnings,” Guzzo said.
Net income of the 8,246 lenders insured by the Federal
Deposit Insurance Corp. in the first quarter dropped 61 percent
from a year earlier as they added to reserves against bad debts,
took charges and collected less income from packaging and
selling loans as securities. One of every five institutions
posted a net loss last quarter, according to the FDIC’s
quarterly banking profile.
Oriental Financial Group Inc., a San Juan, Puerto Rico-
based bank that had $9.1 billion in financial assets at the end
of last year, was cut to “sell” by Sterne Agee & Leach Inc.
analyst Adam Barkstrom on June 9 because of estimated losses in
its securities holdings.
Agency Debt
Investments, 83 percent of which are agency debt and
mortgage securities guaranteed by Fannie Mae and Freddie Mac,
may lose about $80 million in the second quarter, according to
the analyst’s calculations.
Oriental Financial has 80 percent of its assets in
securities and 20 percent in loans, the opposite of a typical
bank, Barkstrom said. Steven Anreder, a spokesman for Oriental
Financial, declined to comment.
Cullen/Frost, with about $15 billion in assets and 100
branches in Texas, is investing in municipal debt and Treasuries
maturing in one to two years, Chief Financial Officer Phil Green
said. The 25 basis-point difference between what it earns on
Treasuries and pays in interest on deposits compares with a
spread of 180 basis points in the first of half of 2007, he
said. A basis point is 0.01 percentage point.
“We are aggressively calling on customers for loan
business, and once they decide to borrow money and build again,
we want to have the liquidity to put the money to loans,” Evans
said. The bank is buying short-dated bonds “so we’ll be ready
when the economy turns,” he said.
‘Sleep Better’
Larry Winum, president of Glenwood State Bank in Glenwood,
Iowa, has also seen deposits outpace loans, driving him to
invest in Treasuries and Iowa municipal bonds. The Iowa lender
has $100 million in assets.
“A bank like ours might not make as much money, but we
sleep better at night,” Winum said.
Bank of the West, a $278 million lender based in Grapevine,
Texas, is investing in mortgage-backed securities guaranteed by
Fannie Mae and Freddie Mac and municipal bonds, Vice Chairman
Cynthia Blankenship said. The bank’s loans grew 8 percent last
year while deposits rose 20 percent, she said.
“We have had some challenges deploying those dollars that
are being saved,” Blankenship said. “You can’t be earning less
than what you’re paying out. That’s always a challenge in a
rising-rate environment.”
To contact the reporters on this story:
Gabrielle Coppola in New York at
gcoppola@bloomberg.net;
Linda Shen in New York at
lshen21@bloomberg.net
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