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Higher interest rates can be a double-edged sword. JPMorgan Chase, Bank of America, Wells Fargo and Citigroup collectively generated $253 billion in net interest income (NII) for all of 2023, up 19% from the 2022 total.
For Wall Street’s big four lenders, expectations that the Federal Reserve will delay rate cuts in response to stubbornly high inflation numbers and a robust labor market mean the good times are likely to continue to roll on. Or is it?
The flip side of higher interest rates is that people also want more money for their savings. Banks have been able to take advantage of the higher rate environment by being quick to charge borrowers more on loans, but being slow to increase the amount paid on customer deposits.
But the tide is turning. As interest rates remain high, more and more customers are moving their money from low-interest checking and savings accounts to higher-yielding products like certificates of deposit, bonds, Treasury and money market accounts.
The first quarter results suggest that 2023 could be as good as it gets when it comes to NII and net interest margins.
At Wells Fargo, first-quarter NII was 8 percent lower than a year earlier. At Citi, the indicator recorded a gain of 1% year-over-year, but fell from one quarter to the next. While JPMorgan raised its NII outlook for this year by $1 billion to $89 billion, the company also said deposit migration — or cash sorting — showed no signs of slowing.
Defending depot bases is not cheap. In the first quarter, Wells paid a rate of 2.34 percent on its interest-bearing deposits, nearly double what it paid a year ago. At Citi, that figure rose nearly 100 basis points to 3.7 percent. JPMorgan paid a rate of 2.85 percent, compared to 1.85 percent in the year-earlier period.
Higher financing costs can be offset by higher loan growth. But high rates can also dampen demand for loans. Average loan balances at JPMorgan and Wells both declined during the first quarter compared to the fourth quarter.
Wall Street retail lenders, which have more diversified revenue streams like investment banking and wealth management, can afford to compete for deposits. Although profits are expected to be lower for many this year, shares of some could be boosted if Basel III capital requirements prove less stringent than feared. It is rather the small regional banks which will be subject to this pressure more. Over the past 12 months, the KBW banking index has gained more than 20 percent, compared to 6 percent for the regional banking index. The gap will persist.