Dear reader, the postal leaflets and emails from local banks urging me to open an account are becoming more plentiful and arriving fast these days. “$300 bonus!” one of them promises. Citizens Bank. Another, from Chase Bank, notes that I can “earn $600” by signing up for a checking and savings account. Even the credit card companies are participating, and American Express offers $250 to new checking account customers.
U.S. banks are competing to attract or retain customers' cash this year after the bankruptcy of Silicon Valley Bank and two other banks triggered a systemwide exodus of deposits.
Competitive pressure has intensified in recent weeks amid a sharp rise in US bond yields. The 10-year Treasury bond rose from 3.7 percent in mid-July to a 16-year high of 4.8 percent this month. That of 30-year government bonds, which ended the third quarter with the biggest quarterly jump in more than a decade, also hit a 16-year high of nearly 5 percent this month.
For US banks, higher interest rates are a double-edged sword. This is something to think about as third-quarter earnings season for the banking sector begins this week.
Banks can earn much more from loans. The average 30-year fixed mortgage rate is now 7.5 percentcompared to 3.1 percent at the beginning of 2022. In the second quarter, net interest margins increased for the most part.
The flip side is that a rising interest rate environment tends to hamper demand for loans. And there are signs that their growth is faltering. At the same time, customers are demanding better returns on their savings. Many have already moved their cash into longer-term deposits or money market funds.
Assets invested in these funds reached a record $5.7 trillion this month. Deposits in US banks fell more than $229 billion since March, to reach $17.4 trillion, according to data from the Federal Reserve.
To compete, banks have to spend money. Rates increase on everything from savings accounts to certificates of deposit. The average share of interest-bearing deposits in the U.S. banking industry rose from 69 percent a year ago to 72 percent in the first quarter, according to Deloitte.
One metric to pay attention to is “deposit beta.” This is the proportion of Fed rate increases that banks passed on to depositors. Morgan Stanley analysts estimate that at large US banks it will reach 47 percent this year, compared with 30 percent at the end of last year.
Faltering loan demand and higher financing costs will reduce net interest margins for banks, which also typically have a large exposure to commercial real estate loans that may be difficult to refinance if rates stay high longer.
Additionally, higher rates can hurt banks by eroding the value of bonds and loans that banks purchased or issued when rates were lower. US banks accumulated $558 billion in unrealized losses in their securities portfolios at the end of June.
After the bankruptcy of Silicon Valley Bank In March, investors focused on the risks posed by paper losses on bond holdings across the sector. This means that any sign of a resurgence of unrealized losses in the third quarter may place new stress on banks' balance sheets.
Many financial groups are already taking on heavy debt under the Fed Term Bank Financing Program. At the end of August, the program had outstanding loans worth $121 billion. These must be paid within one year and are considered a relatively expensive source of liquidity. This explains why agencies are launching promotions to attract depositors' cash. It is considered a cheaper and more stable source of financing.
Small and medium-sized institutions may have difficulty retaining deposits at low costs. Currently, large entities such as JP Morgan Chasewith multiple sources of income, are considered more secure.
However, this does not mean that the big banks will emerge unscathed this earnings season. Rising deposit costs will leave agencies with less room to weather other headwinds. Among them, the continued weakness of investment banking and the new Basel III requirements.
Of the big six banks, Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley are expected to report falling earnings per share this quarter; JP Morgan will be the exception, as it is expected to post a 25 percent increase in earnings per share. Profits are forecast to Bank of America remain stable.
Both the KBW Regional Banking index and the broader KBW Bank index are already down more than 22 percent so far this year. This contrasts with the S&P's 14 percent rise. The wild swings in bank stocks seen in March are now over, but the sector's challenges remain.
Dear reader, enjoy the rest of the week.