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Banks Have 99 Problems But Liquidity Ain't One

The bottom line is that under a dire liquidity crisis in the United States, the big banks would pull through at their current liquidity levels, with plenty of room to spare.

Deploying Liquidity to Improve Earnings

Mosby said that from 2007 through the third quarter of 2012, "a potential unfavorable $3.3 billion hit to net interest income" from insufficient liquidity "has been reversed into a $29.1 billion earnings reserve waiting to be utilized," for the 15 large-cap banks under Guggenheim's coverage.

Under Mosby's "base case" scenario, Bank of America could improve its quarterly net interest income by $3.8 billion, leading to an earnings increase of 20%. For Citigroup, quarterly net interest income could increase by $6.0 billion, with earnings-per-share increasing by 19%. For JPMorgan Chase, quarterly net interest income could grow by $9.9 billion, with EPS increasing by 34%. For wells Fargo, quarterly net interest income could grow by $3.5 billion, increasing EPS by 11%.

The analyst said that "while banks would like, and historically have been able, to deploy liquidity into loan growth, it isn't the only option. When high quality fixed income securities get above 3.5%, Large Cap Banks could utilize some of this earnings impact without too much anxiety over underutilizing these assets."

The trust banks could be looking at the biggest earnings potential from excess liquidity, as they "typically hold liquidity on their balance sheets and the recent deposit flight to quality has increased the impact that deploying these funds could generate today," according to Mosby. But it will depend on how quickly interest rates rise.

"Our analysis suggests that BK, NTRS, and STT could improve earnings levels by 52%, 40%, and 25% by utilizing excess liquidity," Mosby said, but "in today's interest rate environment and due to the short-term nature of the recent inflow of deposits, it would not be prudent to deploy the majority of these available funds, but only utilizing 10% of the available liquidity capacity could significantly improve earnings in the short-run."

-- Written by Philip van Doorn in Jupiter, Fla

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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