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The largest U.S. banks are warning investors that they will eventually have to bow to customer pressure and offer savers higher interest rates, cutting into higher profits from rising interest rates by the Federal Reserve.
As the Federal Reserve raises its benchmark interest rate to a 22-year high, large consumer banks such as JPMorgan Chase and Wells Fargo will be able to charge higher fees on loans without having to pass on correspondingly higher savings rates to savers, especially retail customers .
In third-quarter earnings on Friday, the two banks, along with Citigroup, reported year-over-year growth in their lending businesses that beat analysts’ expectations. The largest U.S. banks, JPMorgan Chase & Co. and Wells Fargo & Co. raised their 2023 loan revenue forecasts.
“The market has been expecting interest rate changes to significantly compress (bank) consumer deposit costs. But that doesn’t seem to be happening,” said Chris Kotowski, an analyst at Oppenheimer Bank.
Large banks benefit from a sense of security that comes from their size and regulators’ designation of them as systemically important to the U.S. economy.
They have also taken in tens of billions of dollars in deposits during the pandemic. That eases pressure to retain clients, some of whom have moved money into higher-yielding areas such as money market funds.
Thousands of small regional bankers across the U.S. have struggled to retain deposits without paying more to their customers.
JPMorgan Chief Executive Jamie Dimon said he disagreed with some of his top executives, including Chief Financial Officer Jeremy Barner, on the issue that competitive pressure could force the bank to offer higher interest rates to savers. Jeremy Barnum, co-CEOs of consumer and community banking Jennifer Piepszak and Marianne Lake.
“There is a big debate within our company. I personally think it will be a little earlier than Jenn, Marianne and Jeremy,” Dimon said in a phone interview with reporters, without elaborating.
Barnum acknowledged that the need to raise interest rates for savers was slower than “previously assumed”.
“We really don’t predict when it’s going to happen,” he said. “We will compete to retain customers. If that means repricing deposits, we will do that, but we will do so based on the competitive environment.”
Wells Fargo Chief Financial Officer Michael Santomassimo said the bank, the fourth-largest U.S. bank by assets, was “pleased” that competitive pressure to raise deposit rates didn’t move as quickly as expected, but warned Say “at some point, it will”.
“There is still a lot of uncertainty in terms of where deposits and pricing will go,” Santomasimo told analysts.
Banks catering to more corporate clients have had to raise interest rates further to retain deposits. Corporate customers are more likely to move funds in search of higher interest rates.
Two-thirds of Citigroup’s deposits are held in corporate accounts, and the average interest rate on its interest-bearing deposits is 3.4%, up from 1.2% a year ago. By comparison, the average rate on JPMorgan’s interest-bearing deposits is 2.53%, up from 0.73% a year ago.
Citi Chief Financial Officer Mark Mason told analysts he believed his banks, particularly Bank of America, may have reached the “final rate,” or the peak interest rate that must be paid to retain depositors.
To combat inflation, the Federal Reserve will raise the federal funds rate to a range of 5.25% to 5.5%. Some investors are betting the central bank will raise interest rates again this year. But others believe it will keep rates unchanged and potentially keep them higher for a long time.
Executives at money management firm BlackRock expect more savers to move cash from bank deposits to money market mutual funds and bonds once they believe the Federal Reserve has stopped raising interest rates.
“We expect investors will begin redeploying assets once rates are finalized,” Chief Executive Larry Fink told analysts on a conference call Friday to unveil third-quarter results.
Bank profits are another sign that the U.S. economy continues to defy predictions of a looming recession this year. Citigroup’s credit card transaction volume increased 8% in the quarter. JPMorgan Chase and Wells Fargo both lowered the amount of money they set aside for potential loan losses from the previous quarter.
“The unemployment rate remains at 3.8 percent,” Barnum said. “Fundamentally, the single biggest driver of consumer credit is the labor market.”
Additional reporting by Brooke Masters
Svlook
