Top US Banks Reveal A $521 Billion Deposit Plunge

banking crisis

EDITOR NOTES: Amid a wobbly financial landscape, America's largest banks brace themselves for the consequences of a precipitous $521 billion drop in customer deposits. The first quarter unveils a bleak scenario, with the financial sector grappling with an uncertain future as deposit levels plummet and market forces wreak havoc. This somber tale delves deep into the disquieting reality of a financial landscape under siege, exploring the impact of the recent collapse of three regional lenders, surging inflation, and the relentless struggle for dwindling deposits. With the KBW Bank Index down 19% and regional banks suffering the most, the upcoming first-quarter disclosures could further amplify concerns about the health and future of the industry, leaving many to ponder whether the storm can be weathered or if a financial catastrophe is imminent.

 

(Bloomberg) -- The largest US banks are about to reveal how they fared as customer deposits came under siege in the first quarter.

Deposits at JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. are expected to have tumbled $521 billion from a year earlier, the biggest drop in a decade, according to analysts’ estimates. The decline — which includes a $61 billion slide in just the first quarter — comes as a late influx of cash following a crisis at regional lenders failed to offset the steady drain of customers to products offering higher rates.

“By far the biggest issue for the banks is around deposits, both for the quarter and for March,” Wells Fargo & Co. analyst Mike Mayo said in an interview. “Non-answers are a failing grade for this take home exam.”

Western Alliance Bancorp learned that lesson the hard way last week, when it released updated financial information that left out data on deposit levels. Shareholders sent the Phoenix-based firm’s stock tumbling, until it released deposit data later in the day that was better than some analysts had feared.

For smaller competitors like Western Alliance, the problem is twofold: Their customers also want more for their money, and the recent collapse of three regional lenders has left consumers jittery, prompting them to yank their cash and store it in larger banks instead.

The turmoil has also weighed on bank stocks. The KBW Bank Index is down 19% this year, and lost 25% in March alone. Regional banks were the biggest losers for the period, with First Republic Bank down 89%.

The coming first-quarter disclosures from the big banks could intensify concerns about deposit-mix and, should lenders miss expectations, set off more inquiries about the health and future of the industry.

Fight for Funds

Lenders began seeing deposits dwindling as early as the start of last year, as historic levels of inflation ate away at consumers’ savings. Still, they were largely able to keep a lid on deposit costs, with many banks still paying just a few basis points in interest on basic checking accounts.

That’s changed. Amid the cacophony of headlines about the Federal Reserve’s aggressive push to raise interest rates, consumers and companies have flocked to money market funds, sending the total amount in these funds to a record $5.2 trillion from $4.59 trillion a year ago.

That means deposit betas, the percentage of change in market rates that banks pass on to their customers, will be in focus in the coming days as they have lagged behind in recent quarters.

“It had already been a fiercely competitive environment for deposit gathering, and the recent bank failures may turn the deposit knife fight into a metaphorical gun fight,” Wedbush Securities analysts David Chiaverini and Brian Violino wrote in a note.

While raising rates could force banks to cough up a few more basis points to savers, they are also handing them record amounts of net interest income. For the biggest banks, that’s boosting net interest margins, a key gauge of profitability that measures the difference between what a bank pays depositors and what it collects on loans.

Still, analysts worry that as banks are forced to spend more on depositors, they’ll see those margins shrink.

“April earnings will be about the outlook, not the results,” Betsy Graseck, an analyst at Morgan Stanley, said in a note to clients in which she lowered the outlook for banks’ profits in 2023 and 2024 “to reflect accelerating deposit betas driving down NIMs.”

Liability Management

The effects of rising interest rates will be felt elsewhere in earnings as well. Back when banks were sitting on record levels of deposits, many lenders chose to invest that excess cash in safe assets — such as Treasuries and mortgage-backed securities — to get a little bit of yield while they waited for loan demand to materialize.

As the Fed’s push to raise rates got underway, it caused the value of those assets to fall. Now, lenders will be scrutinized for those earlier decisions on how and where they invested their excess cash.

“This is a nightmare on ALM-street — asset liability management,” Wells Fargo’s Mayo said.

To be sure, most US banks will hold these assets to maturity, so the losses don’t materialize unless they have to sell. Plus, the collapse of three regional lenders has sparked a rally in Treasuries, which should curb some of the paper losses.

That’s left analysts and investors looking for some kind of update on how these securities portfolios are performing and whether the recent upheaval has changed banks’ approach to investing.

“Investors and stakeholders are going to look at the makeup of a bank’s balance sheet and held-to-maturity assets, which many didn’t pay much attention to until the last few weeks,” John Walsh, leader of EY Americas’ banking and capital markets operation, said in an interview.

Trading Troubles

Despite the recent volatility, banks have still warned that trading revenue is likely to show a drop for the first three months of the year compared to a year earlier, when Russia’s invasion of Ukraine roiled markets and spurred client activity.

For the five biggest Wall Street banks - a group that includes JPMorgan, Bank of America, Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley — total trading revenue is expected to slump $3.2 billion, or 10%, to $29.9 billion.

Those firms have also said the recent market upheaval has contributed to extending the slowdown in dealmaking and capital-markets businesses. Across the five biggest companies, such fees are expected to drop a whopping 25% from last year’s already low levels.

“A lot of this depends on how the geopolitical and macro environment kind of plays out,” Citigroup Chief Financial Officer Mark Mason warned last month. “The trajectory of the rebound is really going to depend on that to some extent.”

 

Originally published by: Katherine Doherty and Jenny Surane on Yahoo!Finance 

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