US banks under pressure as corporate depositors demand higher ratesThe dynamics of the banking sector are undergoing a seismic shift as corporate depositors urge US banks to offer higher interest rates.
This move is causing ripples of concern for the profitability of these financial institutions and underscores the growing challenges they face in generating revenue amidst tightening monetary policy.
Corporate Demand Squeezes US Bank Margins
In the wake of aggressive rate hikes by the US Federal Reserve, major US banks have, until now, enjoyed the ability to raise their loan rates far more rapidly than they’ve had to increase savings interest rates.
This discrepancy has fuelled a significant surge in net interest income, a critical source of profit for these institutions.
However, a shift is materializing as institutional clients opt to move their capital from non-interest-bearing accounts to those offering superior returns, alongside broad-ranging demands for higher rates.
This scenario could signal that the golden age of vast net interest income for banks may be dwindling.
Banks that cater to corporates and high-net-worth individuals, such as Bank of America, PNC, and BNY Mellon, have all recently reported quarter-on-quarter drops in their net interest income.
Still, their share prices rallied between 2.5 and 4 per cent on the back of investor optimism recovering from last week’s slump triggered by State Street’s and Citigroup’s warnings of dwindling benefits from the Fed’s rate increase campaign.
Furthermore, Bank of America’s recent report shows that its interest expense—the amount paid to clients—has risen twice as quickly as its interest income in the last quarter.
Moreover, corporate clients are now keeping a striking 60 per cent of their cash in interest-bearing accounts, a dramatic increase from just 30 per cent last year.
Institutions Eye Better Returns
Pressure from corporate and institutional clients has also led to increasing deposit costs at both Citigroup and State Street. After a 10 per cent quarterly fall in net interest income, State Street anticipates another decrease of 12 to 18 per cent in the next quarter.
Corporate customers, now making up more than 60 per cent of Citigroup’s total deposits, have demonstrated significant sensitivity to interest rate fluctuations.
According to Mark Mason, Citigroup’s Chief Financial Officer, these customers are particularly responsive to rate increases, causing the bank to pass on more of these hikes to their corporate deposits.
Even JPMorgan Chase, which experienced a boost in its lending business following the acquisition of First Republic, is not immune. Corporate and institutional client deposits have been dwindling much faster over the past year than retail client deposits.
As this trend continues, it becomes increasingly clear that banks must adapt to this new landscape. With corporate clients demanding higher returns on their deposits, and the ongoing tightening of monetary policy, US banks are navigating an increasingly challenging terrain.
Yet, this evolving dynamic also presents an opportunity for banks to rethink their strategies and solidify their relationships with these influential depositors.
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