JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) jacked up their deposit rates during the second quarter. That is an ominous sign for smaller regional banks.
The biggest financial institutions in the US have the pricing power and diversity to earn more from their loans even as they pay more to keep deposits, a critical source of funding. JPMorgan, Wells, and Citigroup all showed that Friday when they raised estimates of how much interest income they expect for the full year.
But many smaller institutions, some of whom turned to more expensive borrowings to replace deposits lost in the spring, don't have as many ways to neutralize their own rising costs.
Some are expected to revise down a key measure of loan profitability, which could weigh on their market performance and investor confidence. Stocks of many regional banks slumped Friday.
"We know we are going to see some differences when it comes to the regional banks," Victoria Fernandez, Crossmark Global Investments’ chief market strategist, told Yahoo Finance Friday. "It is a very different story. Their balance sheets look very different."
The first regional institutions release their numbers Tuesday, with reports from PNC (PNC) and Western Alliance (WAL), followed by US Bancorp (USB), Citizens (CFG), Zions (ZION), First Horizon (FHN), and M&T (MTB) on Wednesday.
Truist (TFC), Comerica (CMA), Key (KEY), and Fifth Third (FITB) are on Thursday. Others, including PacWest (PACW), are next week.
'Just unsustainable'
Regional banks were the part of the industry that came under the most stress earlier this year following the turmoil that took down three mid-sized institutions and triggered outflows from smaller banks as customers sought both safety and higher yields.
Some of these banks then struggled in the first quarter with drops in net interest income, which is the difference between what a lender earns from loans and pays out to depositors.
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They began raising their rates to keep or attract back depositors. Some turned to brokered deposits, which is a more expensive and less reliable source of funding.
Across the industry rates on the most generous savings accounts rose to 5.05% at the end of the second quarter, according to Bankrate, their steepest level since February 2008.
Data from the Federal Reserve shows that outflows did eventually stabilize in May.
"Everybody may be ecstatic about the fact that they didn't go under," Dick Bove, a bank analyst with Odeon Capital, said last week. "But these are companies that are paying interest rates now on their deposits which are just unsustainable."
'We're going to have to compete'
The big banks added to the pressure regional banks were under by making their own rate increases to compete for depositors.
Citigroup disclosed Friday that it paid an average rate of 3.09% on its deposits, up from 0.05% a year earlier. JPMorgan Chase paid 2.24%, up from 0.20%. Wells Fargo’s rate was an average of 1.63%, up from 0.07%.
"There is no circumstance that we've ever seen in the history of banking where rates didn't get to a certain point that you had to have competing products," JPMorgan CEO Jamie Dimon said Friday. "And we're going to have to compete for that."
The changes contributed to eye-popping surges in interest expenses for these banks. Those costs went up by 465% at both JPMorgan and Wells Fargo as compared to the year-earlier period.
They absorbed the extra costs by charging more for their loans. JPMorgan's average rate on its loans jumped 6.59% in the quarter, up from 4.28% a year earlier.
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Results from State Street, the 12th-largest bank, may be a better predictor of what the next days and weeks could be like for smaller banks.
On Friday the Boston-based custody bank said its net interest income fell 10% when compared to the first quarter.
That's largely because of rising deposit rates and a rotation by State Street customers out of non-interest-bearing deposits as they seek higher yields. The bank now expects net interest income to drop 12% to 18% in the coming quarter.
Its stock dropped 12% Friday.
"What we found is that our larger clients, and we primarily have large, sophisticated clients, are quite active in thinking about their alternatives," said Eric Aboaf, State Street CFO. "That has been accelerated by the swiftness of this cycle and the place that we've come to and the speed."
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