US banks under pressure as corporate depositors demand higher rates

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Corporate and institutional depositors are demanding higher rates on their deposits, putting pressure on US bank profit margins and signalling that lenders are running out of room to wring more revenue from tighter monetary policy.

As the US Federal Reserve has aggressively increased rates, large American banks, in particular, have been able to increase what they charge for loans much more quickly than they have had to boost interest rates for savers. That has resulted in bumper hauls of net interest income.

However, the trend is starting to reverse as institutional clients shift their cash from non-interest bearing accounts to those that offer a better yield while also demanding higher rates more broadly.

Bank of America reported a quarter-on-quarter drop in NII on Tuesday, as did PNC, which derives around a third of NII from non-retail clients, and BNY Mellon, which caters to corporates, institutions and wealthy customers.

Shares of all three banks rallied by between 2.5 and 4 per cent on Tuesday, recovering from declines last week when comments from State Street and Citigroup made investors start to fret about the diminishing gains from the Fed’s rate rising campaign.

Goldman Sachs analysts flagged the “deteriorating NII outlook” at PNC, and a KBW note described a “heightened focus on deposits and its implications to forward NII” at BNY.

BofA reported that its interest expense, the amount it pays out to clients, had risen twice as fast as its interest income between the first and second quarters. It also noted that corporate clients are now keeping 60 per cent of their cash in interest bearing accounts, up from 30 per cent a year ago.

Citigroup and State Street last week both reported rising deposit costs because of pressure from institutional and corporate customers.

State Street’s shares dropped sharply on Friday after it warned that its 10 per cent quarter-on-quarter NII fall would be followed by another 12 to 18 per cent decline in the third quarter.

Ron O’Hanley, its chief executive, predicted that other banks would face similar headwinds as a wider range of customers became more aware of the possibility of better returns. Some digital banks are offering more than 4 per cent interest on insured deposits, while money market funds, which invest in short-term securities, are offering 5 per cent or more.

“Everybody is being pressed on their NII . . . how quickly and how much is a function of the nature of their deposits,” O’Hanley said. He added that State Street was suffering earlier than others because it had “sophisticated clients and they obviously want to make some money on their deposits, which they weren’t able to do for many, many years”.

Citigroup’s chief financial officer Mark Mason said that corporate customers, which account for more than 60 per cent of Citi’s overall deposits, had been more sensitive to moves in interest rates.

The deposits of large multinationals “tend to have a higher beta associated with them, which means we pass on more of the rate increases that we see to those corporate deposits,” Mason said after the bank reported earnings last week.

Even JPMorgan Chase, whose lending business received a further boost with the acquisition of First Republic in May, has seen deposits from corporate and institutional clients leave at a much faster rate over the past 12 months than retail clients. 

Average deposits in the second quarter of 2023 at JPMorgan’s corporate and investment bank fell almost $75bn, or 10 per cent, from a year earlier. By comparison, its consumer and community bank that houses its Chase retail banking business saw deposits fall 2 per cent over that period. 

JPMorgan chief financial officer Jeremy Barnum told analysts on Friday that the bank’s priority was around “primary bank relationships” — clients who use the bank for a variety of products and services rather than simply a place to park their cash. 

Super regional bank PNC said that its NII had dropped 2 per cent in the quarter to $3.5bn because of increased funding costs as well as lower loan and securities balances. Average deposits also dropped 2 per cent quarter on quarter to $425.7bn. The Pittsburgh-based lender said customers were shifting money out of non-interest bearing accounts and spending their balances.

Bank of New York Mellon’s second-quarter net interest income of $1.1bn was up 33 per cent year on year but 2 per cent lower than in the first quarter.

Dermot McDonogh, chief financial officer, told analysts that non-interest bearing deposits were down 10 per cent in the quarter and warned of “pressures given the higher-for-longer rate environment”.