Funding worries hit some banks more than others


Investors worry about deposits, much more for some banks than for others.

On the one hand, there are monetary central banks such as Bank of America,

JPMorgan Chase and Wells Fargo.

Net interest income for these banks continues to rise, thanks not only to loan growth, but also to a growing gap between funding costs like deposits and the return on assets like loans. A big advantage for these banks are their large pools of consumer and business deposits that are used for day-to-day banking. These tend to take the slowest pressure from rising interest rates, while accounts used for savings, investing or simply storing extra cash tend to revalue faster.

On the other hand, data points from elsewhere this earnings season have raised alarm bells with investors that many banks may be on the verge of seeing mounting pressure on deposit costs.

For example, the net interest margin at First Republic Bank,

which focuses on private banking in wealthier parts of the United States, was down quarter over quarter. The bank said in its earnings call on Friday that it offered attractive certificates of deposit and money market accounts that would help it retain and attract customers, but that came at the expense of pressure net on the interest margin. Total deposits at First Republic rose 4% quarter-over-quarter, although they fell at Bank of America, JPMorgan and Wells Fargo. And First Republic loan growth was sufficient to continue to sequentially increase overall net interest income.

But the market seems spooked: First Republic is down more than 12% since reporting earnings on Friday morning, with the stock bouncing back a bit on Monday. This contrasts with these three money banks, whose shares have each risen more than 4% since Friday morning. Overall, S&P 500 banks have been pretty much flat since then.

One thing investors seem to be watching is brokerage accounts. As rates rise, there are fears that more clients will put idle money there to work in money market funds or in the market, a phenomenon known as cash sorting.

Charles Schwab on Monday announced a 10% drop in its bank deposits from the second to third quarters, although its net interest margin still increased sequentially quite sharply and net interest income still increased by 15%. Still, its shares are down about 3% on the day.

Morgan Stanleyit is

so-called swipe deposits decreased by 18% between the second and third quarters. It is an industry term for deposits that are drawn to banks from uninvested cash in brokerage accounts. The firm said at the same time that some of the money from customers’ investments went into accounts such as high-yield savings at the bank. Overall, deposits were down less than 3% sequentially. For Morgan Stanley, which typically relies more on non-deposit funding than central banks, even higher-cost savings deposits can be attractive. Still, shares of Morgan Stanley have lost more than 2% since Friday morning.

So there are offsets for banks signaling more aggressive deposit movement. And at the end of the day, inventors shouldn’t be too complacent with the biggest banks either. The rapid rise in rates has given some customers little time to react, but Bank of America said Monday it expects to feel more reaction early next year. Additionally, if deposits continue to decline and banks’ loan portfolios continue to grow, more banks may eventually have to either pay for funding or potentially sell securities at a loss.

The pain is not felt evenly as the Federal Reserve continues to ratchet up the pressure. But few will be able to escape it entirely.

Write to Telis Demos at [email protected]

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