EuroFinance

Corporates increased their cash piles with the top US banks to $2.6 trillion at the end of the third quarter of 2021 as treasurers navigate through post-pandemic supply chain bottlenecks and raw material shortages by building more inventories. The hoarding of cash occurred with a renewed demand for loans during the same time period.

Accelerating Deposits

The additional $51 billion in corporate deposits with the US banking giants, JP Morgan, Bank of America Citigroup and Wells Fargo, comes as the Federal Reserve and European Central Bank are warning that supply chain gridlocks are slowing down growth and worsening inflation.

In order to tackle these supply chain disruptions, companies have been building more inventories and ordering further in advance, thereby increasing their short term need for liquidity. As previously analysed by EuroFinance, Auto companies held inventories at a five-year high while going through a global semi-conductor shortage.

The surge in deposits was led by Citigroup, as corporate clients deposited an additional $32 billion with the bank, taking the total deposits to $676 billion at the end of Q3, 5% higher than the previous quarter.

Citi’s presence in emerging markets may have played a role in the deposit increase, as the need to diversify supply chains led multinationals to hold larger cash balances in more countries. Citigroup’s CEO, Jane Fraser said that the key driver for deposits was the bank’s global network.

Following Citigroup was Bank of America and Wells Fargo as their deposit base increased by $16.5 billion and $6 billion to $536 billion and $394 billion, respectively during the same time period.

“Supply chain difficulties and labor shortages continue to represent significant challenges for our client base”, said Charlie Scharf, CEO at Wells Fargo during a 14th October earnings call.

Meanwhile, JP Morgan saw a slowdown in its deposit growth with only a 0.3%, or $2.8 billion rise as its deposit base stood at $1.01 trillion at the end of Q3.

Despite the current issues in supply chains, JP Morgan’s Chairman and CEO Jamie Dimon expects the situation to normalize sooner than later, “I doubt we'll be talking about supply chain stuff in a year.” he said during a third quarter earnings call.

While on the contrary, the European Central Bank believes that firms could end up holding permanently higher inventories as an insurance against supply chain disruptions.

Citing academic evidence, Christine Lagarde, President of the ECB said, “A move away from just-in-time supply chains could therefore mean longer periods of inventory adjustment” during a lecture at IMF Annual meetings on 16th October 2021.

Rebound in Loans

The surge in deposits came as corporate demand for loans rebounded by $18 billion in the third quarter after three consecutive quarters of net repayments, taking the loan book of the top four US banks to $1.56 trillion, only 2% lower than its pre-pandemic level.

Banks earn a net income on the interest paid on deposits and interest received on loans. However, after a flush of liquidity and ultra-low interest rates, loan demand had withered as corporates focused on debt and equity markets for funding resulting in banks placing their focus on technology and digital modifications to accelerate client engagement.

The strategy reaped benefits for Citigroup as investments in supply chain finance helped its loan book to expand beyond the $400 billion mark after rising by 1.3% during the third quarter. As per company’s supplementary fillings, exposures in its treasury & trade solutions (TTS) segment grew by 15% during the quarter.

Citi’s CFO, Mark Mason said during Q3 earning call that “[growth was] mainly in trade loans where our technology investments in supply chain and deep local knowledge are enabling us to meet our clients' needs across the globe”

This growth comes amid rising transaction banking fees charged by Citigroup to its corporate clients which stood at 1.42% per annum, highest amongst its peers as previously analysed by EuroFinance.

JP Morgan also saw its corporate clients draw down $8.4 billion in loan facilities, taking the total outstanding loans to $406 billion at the end of Q3, while Wells Fargo which has the highest loan book amongst its competitors also saw a 1.14% or $4.9 billion increase in loans during the same time period.

The major increase in JPMorgan’s loans was from its CIB division with a loan book consisting of trade finance loans, held-for-investment loans, overdrafts, etc.

By contrast, Bank of America saw a marginal decline of 0.12%, or $374 million in loans as its loan book stood at $324 billion, lowest amongst the pack.