Looking for signs that the retreat in loan portfolios is nearing an end? One early indicator could be the slowdown in deposit inflows that has occurred in the first months of this year.
Bankers have identified a reduction in cash stockpiles as a precursor to a rebound in credit demand. This is particularly applicable to corporations, where resources on hand are abundant.
Comerica Inc., a specialist in business banking, reported that average deposits in its segment for midsize and large enterprises grew 4.7% in the first quarter, to $17.8 billion, but that middle-market balances fell modestly in the Midwest and West and small-business balances fell 2.5%, to $4 billion. In its earnings call, Elizabeth Acton, the company's chief financial officer, said Comerica viewed the reversals as "a positive sign that customers are starting to use their cash."
But handsome profits are helping large businesses stay flush with cash even as they restock inventories, begin to increase capital expenditures and hire more workers.
Moreover, corporations have extraordinary mountains of cash to burn through — deposits, shares in money market mutual funds and currency accounted for 5.8% of total assets at Dec. 31, their biggest share in more than half a century, according to data from the Federal Reserve (see chart).
Cash levels shot up beginning in the second quarter of 2007, when they accounted for 3.9% of assets, in part as companies defended against disruptions of their access to credit. If the 4.3% average that has prevailed so far this decade can be considered sufficient, corporations finished 2009 with a $400 billion surplus.
In a report last month, economists at Societe Generale AG wrote that they "believe that businesses are now overdoing it" as they allow depreciation to exceed capital expenditures, replace physical assets with cash and let productive capacity erode in an economy that is likely to grow in the long term. "This is a potentially self-destr[oy]ing behavior," they said.
Preliminary data indicates that big business is maintaining a conservative cash position into this year. Among the 155 nonfinancial companies in the Standard & Poor's 500 index for which first-quarter financial reports were available in the last week of April, cash and equivalents accounted for 13.4% of assets, according to data from Capital IQ, a division of S&P. For all 421 nonfinancial companies in the index, cash's share had increased 2.8 percentage points from the first quarter of 2008, to 10.7% by the end of last year.
At U.S. Bancorp, average deposits, excluding acquisitions, declined 1.7% in the first quarter, to $182.5 billion, which the company attributed primarily to lower noninterest balances in its corporate trust and wholesale banking divisions. In its earnings call, Richard Davis, the company's chief executive, said that loan growth would lag a pickup in mergers and acquisitions and other signs of renewed business activity as companies first draw down their cash holdings.
It would take a couple of quarters, Davis predicted, before "the systemically core activities that cause long-term organic growth" emerge and lending grows "not just from line usage but from people coming back into the game."