Most corporate treasuries still opt for depositing cash in banks, despite federal deposit guarantees ending a year and a half ago, according to the Association of Financial Professionals’ (AFP) 2014 Liquidity Survey. However, that may already be changing as the economy starts to show stronger growth momentum and companies reduce their cash balances.
Generating 740 responses from executives at a wide variety of Fortune 1000 companies, the survey was conducted in May and its findings released in mid-July. It found that 52 percent of companies’ short-term investment balances were maintained in bank deposits, up from 50 percent last year.
“It suggests federal insurance itself was not the main reason corporates put their cash in banks,” said Kevin Roth, PhD, managing director, research and strategic analysis at the AFP.
The FDIC’s insurance under the Transaction Account Guarantee Program (TAGP) was initiated in the wake of the financial crisis and provided full coverage of deposits in non-interest bearing bank accounts. Before it ended in December 2012, there was anticipation that corporates, without the guarantee, would shift cash away from banks to alternatives such as money market funds (MMFs) and government bonds.
Roth said a couple of factors have instead increased corporate bank deposits. For one, historically low interest rates have made higher paying alternatives few and far between, and because those alternatives are potentially riskier corporates have opted to stay with their relationship banks.
Earnings Credit Rates (ECRs), the calculated interest paid on idle cash that reduces bank service charges, are a second factor. And uncertainty around regulators’ pending money-market-fund (MMF) regulations, in the works for the last few years, represents a third.
“Companies have been pulling money out of MMFs, because some of proposed rules will end up violating their current investment policies,” Mr. Roth said, noting the likely introduction of a floating net asset value (NAV) and redemption fees as problematic.
Beyond bank deposits, corporates most common investment vehicles are Treasury bonds, money market funds and commercial paper (CP). The survey found that, excluding CP, they made up 75 percent of corporates’ cash balances, significantly higher than the 56 percent in 2006, when there was stronger economic growth. In the AFP’s 2008 survey, conducted before the financial crisis hit, bank deposits made up only 25 percent of cash balances.
The survey also found that companies placed their cash and short-term investment balances in an average of 2.7 vehicles, the same as last year, and 70 percent of short-term investments have maturities of 30 days or less; four out of five respondents do not anticipate changes in terms of investment portfolio tenors next year. Safety continues to drive investment policies, according to the survey, with 68 percent of respondents citing it as the most important short-term investment objective, and 28 percent putting liquidity at the top of the list.
Three in five companies hold some cash outside the U.S., and that portion increases to 75 percent for publicly owned companies, of which one in three hold at least half their cash abroad.
Companies continue to build their cash balances. Thirty-six percent of respondents reported higher cash balances in first quarter 2014 than the same period the year before, while fewer than a quarter reported lower balances. The survey attributes the higher cash balances to greater operating cash flow, cited by 73 percent of respondents, as well as accessing debt markets (18 percent) and acquiring a company or launch new operations (18 percent).
In terms of those companies that reduced their cash balances, 43 percent attributed the change to increase capital expenditures, 36 percent to decreased operating cash flows, and 28 percent to retiring debt.
Looking ahead, stronger economic growth and the likelihood of rising interest rates will probably prompt shifts in companies’ cash and short-term investment strategies.
“The Federal Reserve is very slowly pulling the proverbial punch bowl away from the party, and at some point companies may sniff around for yield,” Mr. Roth said.
He added that size of corporate cash balances may drop or at least grow less quickly as the economy continues to show stronger growth momentum, exhibited recently by greater M&A activity and capital expenditures, and firms’ caution ebbs a bit. The report notes that the Fed’s pull back from historically accommodative monetary policies has so far only impacted long-term rates, but in 2015 or possibly later short-term rates are expected to inch up.
“Whether the ability to generate yield is enough to pique corporate investor interest in investment vehicles outside of those thought to be traditionally ultra-safe (i.e., bank deposits, MMFs and Treasury securities) remains to be seen,” the report says.