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High interest rates can be a double-edged sword. JPMorgan Chase, Bank of America, Wells Fargo and Citigroup collectively generated $253 billion in net interest income (NII) for all of 2023 — a 19 percent jump from 2022's total.
For Wall Street's big four lenders, expectations that the Federal Reserve will delay interest rate cuts in response to stubbornly high inflation readings and a strong labor market mean the good times should continue. Or is it?
The flip side of high interest rates is that people also want more from their savings. Banks have been able to take advantage of the high-rate environment by being quick to charge borrowers more on loans but slowly increasing what they are paid on customer deposits.
But the winds are changing. As interest rates continue to rise, more customers are moving their money from lower-interest-rate checking and savings accounts to higher-yielding products such as certificates of deposit, Treasury bills, and money market accounts.
Q1 earnings suggest 2023 could be as good as it gets when it comes to NI insurance and net interest margins.
At Wells Fargo, first-quarter national insurance was down 8 percent from a year earlier. At Citi, the metric gained 1 percent year-on-year, but declined quarter-on-quarter. While JP Morgan raised its National Insurance forecast for this year by $1 billion to $89 billion, it also said that deposit exodus – or cash shedding – shows no signs of slowing.
Defending deposit rules is not cheap. During the first quarter, Wells paid an interest rate of 2.34 per cent on its interest-bearing deposits, nearly double what it paid a year ago. At Citi, the figure rose by about 100 basis points to 3.7 percent. JPMorgan paid an interest rate of 2.85 percent, up from 1.85 percent in the same period the previous year.
Higher financing costs could be offset by stronger loan growth. But higher interest rates can also hamper demand for loans. Average loan balances at JPMorgan and Wells shrank during the first quarter compared to the fourth quarter.
Wall Street retail lenders, which have more diversified sources of revenue such as investment banking and wealth management, can afford to struggle for deposits. Although profits are expected to be lower for many this year, stocks in some may get a boost if capital requirements under Basel III turn out not to be as bad as feared. Instead, it will be the smaller regional banks that will feel more of this pressure. Over the past 12 months, the KBW Banking Index has risen more than 20 percent, compared to a 6 percent increase for the Regional Banking Index. The gap will continue.
pan.yuk@ft.com
