Is 2023 the year the sleeping bank depositor finally wakes up? It is increasingly looking that way.
The sharp spike in interest rates and strong lending growth generated big windfalls for US banks last year. This has helped buffer their bottom lines against declines in other key areas of their businesses.
JPMorgan, Bank of America, Citigroup, and Wells Fargo collectively made $212.8bn in net interest income (NII) for the whole of 2022 — a 23 per cent rise from the prior year. The gains were pronounced in the final quarter. NII across the four banks jumped 36.5 per cent as they were quick to pass on the higher rates to borrowers — but not to savers.
But the pressure to compete for cash is mounting. Bank deposits — already down $367bn from their April peak of $17.7tn — are expected to shrink even more this year and next. Depositors are seeking higher-yielding alternatives. The Fed is shrinking its balance sheet through quantitative tightening. These funding costs, which have trailed rate hikes thus far, could emerge as a headache for some this year.
Big lenders such as JPMorgan and Bank of America can afford to shed some deposits, but that does not mean they are not feeling the pressure. JPMorgan on Friday issued a forecast for 2023 NII growth that fell short of analysts’ expectations.
Keep an eye on “deposit beta”. This is the share of Fed rate hikes that banks pass along to depositors. S&P Global Market Intelligence reckons average deposit beta across US banks will jump from 22 per cent to 32 per cent this year.
Higher deposit costs will leave US banks less wriggle room. Challenges include continued weakness in investment banking revenues, new capital requirements and a slowing economy. The latter is reflected in the billions of provisions that BofA, JPM, Citi and Wells Fargo have set aside.
The KBW bank index is down 28 per cent over the past 12 months, compared with the S&P 500’s 15 per cent decline. The gap will persist for months to come.
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