Short-term corporate cash reserves are increasingly moving toward banks, with bank deposits now accounting for 52 percent of short-term corporate investments, according to a recent survey released by the Association for Financial Professionals (AFP) and underwritten by RBS Citizens.
The ninth AFP Liquidity Survey gathered data from 740 respondents and aims to gauge the confidence of United States businesses in their future prospects by asking about their accumulation of cash reserves. The recent slowed growth of cash reserves, in other words, reflects increasing confidence, as American businesses increasingly use cash to make capital investments, hire new workers, engage in mergers and acquisitions, pay out dividends and repurchase company stock.
However, companies apparently still feel more comfortable keeping those cash reserves in bank deposits, with 52 percent of short-term corporate cash reserves maintained at banks. According to a statement accompanying the AFP survey, that is the largest percentage reported since the organization began tracking this information. Last year, that figure stood at 50 percent and as recently as 2008, it stood at just 25 percent.
Beyond banks, companies responding to the survey identified Treasury securities, money market funds and commercial paper as preferred investment vehicles. According to the survey, 75 percent of all cash balances are maintained in banks, money market funds and Treasury securities. In 2006, that figure stood at 56 percent.
Sixty-eight percent of survey respondents said safety was their highest priority, and 28 percent said liquidity was their top priority. Yield remained a distant third.
The AFP survey identified three key reasons behind the growth in bank deposits. First, there exist few alternatives with any yield. Second, companies are still uncertain about future changes in money market funds. And finally, many banks allow their corporate customers to defray service fees through Earnings Credit Rates on large cash holdings.
Fewer than a quarter of survey respondents reduced reserves, which they mainly used for capital expenditures (43 percent), retiring debt (28 percent), acquisitions and launches of new businesses (20 percent) or stock repurchases or dividends (20 percent).
The survey’s authors also wrote, "It is important to note that variation in cash holdings can be seasonal and is dependent on current economic conditions. As companies weigh their business prospects against business environment uncertainty, many build up their cash balances and keep that cash on the sidelines, awaiting better economic conditions and/or the right growth opportunity, thus creating variability in the measurement of cash holdings."
