Banks' Deposit Costs Eclipse Interest Earnings Amid Rate Hikes

Key Takeaway

• US banks, including Wells Fargo and JPMorgan Chase, paid more in depositor fees than they earned in interest revenue last quarter for the first time in two years.
• Deposit costs rose by an average of 5% across major banks like BofA and Citi, a slowdown from previous quarters' sharp increases.
• Despite higher deposit rates offered to savers, averaging 2.9%, this remains significantly below the Fed's rate of 5.5%.

Deposit Costs Outpace Interest Revenue

For the first time since the Federal Reserve began its rate hikes two years ago, the largest US banks have seen their deposit costs rise more than their interest revenue in the last quarter. Wells Fargo, for instance, paid nearly $594 million more in fees to depositors than in the previous quarter, overshadowing the mere $1 million gain in interest from loans and investments. Similarly, JPMorgan Chase and Citi each paid out about $350 million more to depositors, a stark contrast to the $2.3 billion additional interest they earned above what they paid to depositors in the preceding quarter. Bank of America's rising deposit costs equaled two-thirds of the new interest received in the same period.

Savers Demand Higher Returns

The shift in deposit costs versus interest revenue is a direct result of savers demanding that lenders share the benefits of higher rates. Greg Hertrich, head of US depository strategies at Nomura, highlighted that deposit costs are set to continue rising regardless of rate movements. The competitive landscape for deposits has broadened significantly, with banks now having to advertise their deposit rates to a much wider audience than before. This change comes after a period of significant increases in what banks have had to pay out to keep depositors, with costs up an average of 5% in the first quarter across BofA, Citi, JPMorgan, and Wells Fargo, although this is a slowdown from the 13% jump seen in the fourth quarter and 38% a year ago.

Interest Revenue Stagnation

As deposit costs have risen, the interest payments banks collect from their loans and investments have nearly stalled. In the first three months of this year, interest revenue at the four major banks rose by less than half a percent, a mere $500 million increase from the previous quarter. This stagnation is attributed to a lack of rebound in lending demand, as noted by Hertrich. Despite this, the banks still retain a significant portion of the interest they collect, paying out just 26% on average to depositors in the most recent quarter.

Competitive Deposit Rates and Investment Shifts

In response to the higher-for-longer interest rates, Americans have begun to arbitrage, moving their money from traditional bank accounts to higher-yielding Treasury bills, money market funds, and brokered CDs. This shift has forced banks to compete for deposits by offering more attractive interest rates to prevent deposits from fleeing and to attract new ones. The total money market funds held by households and institutions spiked to $6.36 trillion by the end of the fourth quarter, according to the Fed's data. Banks have had to adjust by offering CDs that yield 4% or 5% and more, even to their existing customers, to provide funding that is more stable than savings or checking accounts.

Street Views

• Greg Hertrich, Nomura (Neutral on US depository strategies):

  "Regardless of what happens to rates, deposit costs are going to continue to rise... Traditionally, the way it has worked is that your deposit base usually came from your same metropolitan area. But in today’s environment, the vast majority of deposit rates are advertised to a much wider audience than they used to be." "Lending demand has not rebounded at the level they had hoped."

Management Quotes

• Jeremy Barnum, CFO of JPMorgan:

  "As we’ve been saying for a while, migration from checking and savings to CDs is sort of the dominant trend... We continue to capture that money-in-motion at a very high rate."