The U.S. banking sector is finding it difficult to cope with a problem most people would love to have: surplus cash. But the overflow of deposits into U.S. financial firms, at a time when several banks are having problem making new loans, indicates trouble for the industry as banks set to release fourth-quarter earnings.
Wells Fargo & Company (NYSE:WFC), the biggest U.S. bank by market value, will open the industry’s earnings line on Friday morning. Market Rates Insight Inc., a San Anselmo, Calif., firm that tracks deposit data claims that deposits hit a record $10.6 trillion at the end of 2012. Meanwhile, the part of each deposit dollar that banks give out as a loan hit a post-recession low in the third quarter, according to data tracker SNL Financial of Charlottesville, Va.
Too much cash can help cushion banks in financial crisis, but it also helps to explain why banks’ net interest margin, the amount they receive by pocketing the gap between the interest rate paid to depositors and the rate charged to borrowers, has faced a sharp decline.
Wells has been one of the injured parties in recent quarters, with its net interest margin moving down to 3.66% in the third quarter from 3.84% in the same period a year earlier.
The rate of providing loans has been a tricky part for banks. Banks normally maintain their loan-to-deposit ratio near 100%. But the ratio has declined to a recent 72% as compared to 95% in 2007, according to SNL. The SNL data also revealed that loans outstanding at U.S. banks and thrifts since 2008 have declined 5.3% to a recent $7.58 trillion.
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