JULY 14, 2011, 4:07 P.M. ET
Wall Street Journal
J.P. Morgan Parks Cash at Central Banks as Deposits Grow
NEW YORK—As deposits piled up at J.P. Morgan Chase & Co. in the second quarter, the bank took them and parked the money in deposits at central banks around the world.
The giant bank parked $170 billion in deposits at central banks at the end of June, it reported Thursday. The amount was four times the amount a year earlier, and is considerably more than all the deposits held by SunTrust Banks Inc., which, with about $120 billion in deposits, is the seventh-largest U.S. bank by that measure.
The surge in J.P. Morgan's central-bank deposits—safe, easily accessible but low yielding—illustrates how the nation's third-largest bank by deposits is unable to make loans as fast as clients make deposits. In this instance, the deposit growth came, in particular, from corporate customers. Bank of America Corp. holds the most deposits among U.S. banks.
A flood of deposits into banks "is an issue for the industry," RBC Capital Markets analyst Gerard Cassidy said. "Deposits are flowing in over the gunnels and there is no place to put them. Loan demand is not strong enough to absorb the deposit flows."
On June 29, banks held $1.6 trillion in deposits with the Federal Reserve, according to data from the central bank, up 45% from a year earlier.
J.P. Morgan Chase wouldn't discuss how many of its central-bank deposits are at the Federal Reserve, and how many are at central banks abroad.
J.P. Morgan Chase's total deposits—those it received from its customers—rose 18% in the second quarter from a year earlier, to just over $1 trillion. The bank said demand for new loans, particularly from businesses, is improving. But many older loans are getting paid off, and many mortgages and credit-card loans continue to be written off because the borrowers can't pay them back.
All said, the total loan book remained virtually flat, at $690 billion, and is considerably smaller than the deposit balance. J.P. Morgan said its second-quarter profit rose 13%, to $5.4 billion.
The bank invested more than $1.1 trillion in debt, derivatives and other securities, dwarfing its deposits at central banks. J.P. Morgan's sources of funds are broader than its deposits alone.
But deposits at central banks are attractive because J.P. Morgan can get that money back quickly if it sees opportunities to make more loans or otherwise invest it.
The interest rate, however, is low. Barclays Capital analyst Jason Goldberg said J.P. Morgan's net interest margin—the profit margin in the lending business—was lower than expected in the second quarter, and the low yield J.P. Morgan gets for its deposits was at least partly to blame.
"The hope is loan growth comes back sooner rather than later," Mr. Goldberg said. He added that buying securities when interest rates are at an all-time low isn't attractive.
RBC's Mr. Cassidy said earning 0.25 percentage point on an asset with zero risk weighting "certainly helps with a bank's Tier 1 common ratio," a key measure of a bank's capital strength.
Wall Street Journal
J.P. Morgan Parks Cash at Central Banks as Deposits Grow
NEW YORK—As deposits piled up at J.P. Morgan Chase & Co. in the second quarter, the bank took them and parked the money in deposits at central banks around the world.
The giant bank parked $170 billion in deposits at central banks at the end of June, it reported Thursday. The amount was four times the amount a year earlier, and is considerably more than all the deposits held by SunTrust Banks Inc., which, with about $120 billion in deposits, is the seventh-largest U.S. bank by that measure.
The surge in J.P. Morgan's central-bank deposits—safe, easily accessible but low yielding—illustrates how the nation's third-largest bank by deposits is unable to make loans as fast as clients make deposits. In this instance, the deposit growth came, in particular, from corporate customers. Bank of America Corp. holds the most deposits among U.S. banks.
A flood of deposits into banks "is an issue for the industry," RBC Capital Markets analyst Gerard Cassidy said. "Deposits are flowing in over the gunnels and there is no place to put them. Loan demand is not strong enough to absorb the deposit flows."
On June 29, banks held $1.6 trillion in deposits with the Federal Reserve, according to data from the central bank, up 45% from a year earlier.
J.P. Morgan Chase wouldn't discuss how many of its central-bank deposits are at the Federal Reserve, and how many are at central banks abroad.
J.P. Morgan Chase's total deposits—those it received from its customers—rose 18% in the second quarter from a year earlier, to just over $1 trillion. The bank said demand for new loans, particularly from businesses, is improving. But many older loans are getting paid off, and many mortgages and credit-card loans continue to be written off because the borrowers can't pay them back.
All said, the total loan book remained virtually flat, at $690 billion, and is considerably smaller than the deposit balance. J.P. Morgan said its second-quarter profit rose 13%, to $5.4 billion.
The bank invested more than $1.1 trillion in debt, derivatives and other securities, dwarfing its deposits at central banks. J.P. Morgan's sources of funds are broader than its deposits alone.
But deposits at central banks are attractive because J.P. Morgan can get that money back quickly if it sees opportunities to make more loans or otherwise invest it.
The interest rate, however, is low. Barclays Capital analyst Jason Goldberg said J.P. Morgan's net interest margin—the profit margin in the lending business—was lower than expected in the second quarter, and the low yield J.P. Morgan gets for its deposits was at least partly to blame.
"The hope is loan growth comes back sooner rather than later," Mr. Goldberg said. He added that buying securities when interest rates are at an all-time low isn't attractive.
RBC's Mr. Cassidy said earning 0.25 percentage point on an asset with zero risk weighting "certainly helps with a bank's Tier 1 common ratio," a key measure of a bank's capital strength.
