CFOs Seek Higher Returns on Cash, but Banks May Be Slow to Raise Rates

Those cash holdings surged in the wake of the pandemic as companies raised billions of dollars to boost their liquidity. The economic recovery and the increase in earnings led to cash holdings growing further. With short-term interest rates near zero however, businesses generated little return.

Those returns should improve as the Fed raises interest rates to address elevated inflation, but it may not happen overnight. The increase in interest paid on corporate accounts will come with a delay, banks and analysts said.

Banks’ deposit beta, which refers to the increase in interest paid for deposits in response to broader interest rates, will likely be close to 0% for the first quarter to half percentage point by which the Fed raises its benchmark federal-funds rate, analysts at Wells Fargo & Co. said in a recent note.

That’s due to the size of the cash piles sitting at banks—both from companies and consumers—and the loan-to-deposit ratio, which measures the amount of deposits being handed out as loans and which has been hovering at decade lows around 60% in recent quarters, Wells Fargo said in the note. Wells Fargo estimated banks will pass on about half of the increase to corporate customers after about four consecutive rate increases.

Representatives from Bank of America Corp. , Citigroup Inc., Goldman Sachs Group Inc. and Wells Fargo declined to comment.

“Banks don’t need to take more deposits until lending picks up,” said Pete Gilchrist, executive vice president at Curinos, which provides data, platforms and advice to financial-services firms. “Banks still have too much corporate cash sitting idle on the balance sheet,” Mr. Gilchrist said.

That could lead banks to pass on higher interest rates slowly or to select corporate customers first. “It’s like going to the car dealer who gives you a good deal in expectation of all the service work in the coming years,” said Tony Carfang, managing director at The Carfang Group, a treasury consulting firm. Banks might agree to pay a corporate customer a higher interest rate in exchange for other services, for example treasury management or help with debt or equity capital markets transactions, Mr. Carfang said.

Banks also will review the locations and currencies in which they might want to increase their business and offer higher interest based on that, one corporate banker said.

Companies in the S&P 500 held $3.72 trillion in cash and cash equivalents at the end of 2021, up from $3.59 trillion the year before and $2.28 trillion at the end of 2019, data provider S&P Global Market Intelligence said.

Adding smaller and privately-held companies, the cash pile stood at $4.06 trillion at the end of last year, according to an analysis of Federal Reserve data by Carfang Group. About half that amount, which excludes holdings from banks and other financial institutions, were held as cash or in checkable deposit accounts, whereas 8.2% were time deposits and around 17% were invested in money-market funds that invest in highly liquid and short-term debt, Carfang said.

“If rates go up, I would love to get a better return on the cash on my balance sheet,” said Michael Fleisher, chief financial officer of Wayfair Inc. The e-commerce company, which sells furniture and home goods, held $2.4 billion in cash in bank accounts, cash equivalents and short-term investments, such as other companies’ bonds, at the end of 2021.

CFOs from chip manufacturer Qualcomm Inc., department-store operator Kohl’s Corp. and network-equipment maker Cisco Systems Inc. also said they are anticipating bigger returns for their money. “As rates go up, the cost of capital goes up but also the return on our cash,” said Akash Palkhiwala, the CFO of Qualcomm. The company had $6.61 billion in cash and cash equivalents and $4.70 billion in marketable securities as of Dec. 26, when its latest fiscal quarter ended.

“With the low interest rates, there hasn’t been a lot of interest for our cash holdings,” Kohl’s CFO Jill Timm said. “If we can get a few extra points in interest, that would be welcome.” The company held $1.59 billion in cash and cash equivalents as of Jan. 29, the end of its latest reporting period.

“The change in interest would be a slight positive for our profit and loss [statement],” Cisco CFO Scott Herren said, pointing to the company’s net cash position. Cisco had $21.1 billion in cash, cash equivalents and short-term investments at the end of its most recent quarter. “Not that I want rates to go up, but it has a different effect on us,” Mr. Herren said.

Companies seeking higher returns on their cash could increase their investments in money-market funds, which are expected to trade higher as interest rates go up. “For financial treasuries, they may consider short to longer-term investments—like money funds—to increase return,” said Lori Schwartz, head of liquidity and account solutions at JPMorgan Chase & Co.

Total assets in money-market funds decreased by $30.48 billion to $4.58 trillion during the week ended March 9, according to the Investment Company Institute, an industry association.

“Many of these CFOs and treasurers are going to be incentivized to think about their financials and what it would mean to not get higher interest,” said Scott Siefers, a managing director at financial services firm Piper Sandler Cos. “Right now, with rates at near zero, it doesn’t matter. But if rates are no longer at near zero, the opportunity cost of not earning more with your money becomes more visible,” he said.

—Kristin Broughton contributed to this article.

Write to Nina Trentmann at [email protected]