U.S. Banks Getting Big Inflow of Deposits, But Savers, Investors in for Disappointment

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Experts say it's not 2008, and consumers shouldn't lose sleep over the safety of their money in the bank. They should, though, expect lean years ahead both for investors and account holders.

"Our banks are still a safe place to keep your money, you're just not going to get much interest. The bank stocks might not be such a safe place to keep your money," says Mike Mayo, managing director, banks, for CLSA.

Stocks of the biggest U.S. banks showed modest gains today, continuing their rebound from Wednesday's nosedive. By late morning all the following were up: Bank of America (2.3 percent), Citigroup (2.74 percent), Wells Fargo (0.8 percent) and HSBC (1.4 percent). J.P. Morgan Chase declined 0.1 percent.

Richard Bove, an analyst with Rochdale Securities, says big banks have been benefitting from a massive infusion of money in recent weeks. Corporations and individuals pumped some $100 billion into bank deposits in the last week of July. He expects to see as great or greater an amount for the first week of August. Where's the money coming from? In large part from people selling bank stocks.

"It's ironic that at the same time people are selling bank stocks like crazy, because the're worried about issues X,Y, and Z, that they're putting the money from those sales into the very same banks, as deposits," says Bove. Of the $100 billion amount, he says: "That's never happened before. In the week after 9/11, $120 billion was deposited, but it came right back out very rapidly."

He says that except for that deposit, there's been nothing comparable since 1975. "All of it," he says, "is concentrated in bank checking accounts."

"It's a massive contradiction: Selling bank stocks, and then putting the money in the bank." But it's a contradiction he thinks will not persist: This gesture of confidence by depositors cannot help but redound, eventually, to the banks' share prices. "Ultimately, it will filter back into the stocks."

As for bank safety, he says, "No market is going to collapse with this much liquidity."

"One word -- volatile -- is the only word you need to know when it comes to bank stocks," Mayo said.

Major bank stocks had nosedived Wednesday and then bounced back Thursday, with Bank of America up 7 percent after declining 10.9 percent on Wednesday, and Morgan Stanley up 10.7 percent following the previous day's 9.6 percent tumble. The sharp dive Wednesday was largely tied to rumors that French bank Societe Generale was in trouble.

"The recession has gone global, so banks who have gone global have no strong spots," said Bill Bartmann, president of Bill Bartmann Enterprises.

Despite the bounceback Thursday, analysts said there are still long-term underlying worries about banks big and small, in part because of their ties to troubled European financial institutions. "In the U.S., five or six banks are directly affected by Europe; 7,000 never loaned a dime to Europe but are tied in through agreements with the big banks," says Rochedale's Bove.

He said sovereign debt woes in Europe will affect the ability of our banks to generate earnings. "The banks in the U.S. will lack the ability to fund growth in the U.S. economy. We're making it a fortress," Bove said of the banking system. "It's not going to go under, but it's not going to make a lot of money."

Investors in bank stocks are getting increasingly impatient. Bank of America CEO Brian Moynihan was asked on a conference call with investors this week if it would be possible for the bank in future to average a 1 percent return on assets and 10 percent on equity. "In other words," Moynihan said, rephrasing the question, "can we earn enough to have this business make sense?" He added that the targets were achievable in a normal business cycle. "If you don't have that, you're not going to get investors to invest in this industry."

Mayo, whose upcoming book "Exile on Wall Street" examines the banking climate, says this year is on target to be the worst since 1938 in revenue growth for banks, and "that was before Europe, before the (S & P) downgrade. You lay on top of that those two events, that revenue growth looks even worse. The U.S. is showing a lighter version of what's taken place in Japan in the last 20 years."

A veteran banker said the debt downgrade is a lagging indicator that has woken people up to the underlying problem of debt in our banks and our economy.

"Leverage kills," agrees Robert Eisenbeis, chief monetary economist for Cumberland Advisors. He said U.S. banks are going to have to raise more capital and if they cannot, they may have to shrink.

"U.S. banks had too much debt and lent money to individuals who had too much debt," says Mayo. "All of a sudden our country seems to realize we have too much debt. It's lean times, but not desperate times."

Analysts agree that the failure of a major institution is not in the cards, though smaller regional banks are vulnerable. But their weakened financial state has a harmful ripple effect for the country as a whole."We've taken banks out of the picture in providing growth to the U.S. economy," says Bove.