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Higher interest rates can be a double-edged sword. JPMorgan Chase, Bank of America, Wells Fargo and Citigroup collectively made $253bn in net interest income (NII) for the whole of 2023 — a 19 per cent jump from 2022’s total.
For Wall Street’s big four lenders, expectations that the Federal Reserve will delay rate cuts in response to stubbornly high inflation readings and a robust job market mean the good times should continue to roll. Or does it?
The flipside to higher interest rates is people also want more for their savings. Banks have been able to profit from the higher rate environment by being quick to charge borrowers more on loans but slow to increase what is paid on customers’ deposits.
But the wind is changing. As high rates persist, more customers are moving their money out of low-interest rate checking and savings accounts and into higher-yielding products like certificates of deposit, Treasuries and money market accounts.
First-quarter earnings suggest 2023 may be as good as it gets when it comes to NII and net interest margins.
At Wells Fargo, first quarter NII came in 8 per cent lower compared with a year earlier. At Citi, the metric eked out a 1 per cent year-on-year gain but fell quarter on quarter. While JPMorgan raised its NII outlook for this year by $1bn to $89bn, it also said deposit migration — or cash sorting — is not showing any signs of slowing.
Defending deposit bases does not come cheap. During the first quarter, Wells paid a rate of 2.34 per cent on its interest-bearing deposits, nearly twice what it paid a year ago. At Citi, the figure increased nearly 100 basis points to 3.7 per cent. JPMorgan paid a rate of 2.85 per cent, up from 1.85 per cent in the prior-year period.
Higher funding costs can be offset by stronger loan growth. But high rates can also stymie demand for loans. The average loan balances at JPMorgan and Wells both shrank during the first quarter compared with the fourth quarter.
Wall Street retail lenders, which have more diversified sources of revenues like investment banking and wealth management, can afford the fight for deposit. Although profits are expected to be lower for many this year, shares in some of them may get a boost if Basel III capital requirements turn out to be not as bad as feared. Instead, it will be smaller regional banks that will feel more of this pressure. Over the past 12 months, the KBW bank index has gained more than 20 per cent, compared with the 6 per cent increase for the regional banking index. The gap will persist.
pan.yuk@ft.com
Source: Economy - ft.com
