Saturday, July 29, 2023

Banks are still losing deposits. Just not the banks you might expect. 

The banks that showed some of the biggest deposit declines during the second quarter weren’t midsize regional lenders.

They were the industry’s giants.

JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) — the four biggest banks by assets — gave up a net $262 billion in deposits when compared with the year-earlier period. From the first quarter to the second quarter, customers pulled $62 billion from three of those banks.

Many regional banks, meanwhile, gained deposits back. Investors rewarded them for it, sending their stocks higher over the past two weeks.

The deposit divergence reverses a trend that took hold during a chaotic scramble for safety following the failures of Silicon Valley Bank, Signature Bank, and First Republic. Those seizures led to crippling withdrawals at a number of regional banks during the first quarter and inflows to the industry’s biggest players.

The reason for the reversal in the second quarter is that regional banks now need deposits more than the giants, and they are paying higher rates to get them. The industry titans can afford to keep their rates lower because of their scale, pricing power, and diversity of funding.

"The regionals are winning the deposit battle right now because they’re willing to pay the most," Alexander Yokum, a CFRA equity analyst specializing in regional banks, told Yahoo Finance.

"Ironically," Yokum added, the deposit outflows from the big banks is "actually a sign of strength" for those institutions.

The trend isn’t abating in July, the first month of the third quarter. Deposits at the largest banks in the US dropped $78 billion during the week ending July 12, just days before the start of bank earnings season.

That was the biggest drop since the week ending March 22, when the regional banking crisis was still in full force. Both big and small banks showed small rises the week ending July 19.

Some money is still flowing out of the banking system altogether as customers seek higher yield elsewhere.

One place is to US money market funds. They have received net inflows of $623 billion, two thirds of which came in March and May of 2023. Investors sent $28 billion to these funds over the last week ending July 26.

Read more: The best high-yield money market accounts for July 2023

'The best place for their money'

Banks of all sizes have been struggling to keep depositors well before Silicon Valley Bank’s failure due to pressure being applied by an aggressive Federal Reserve campaign to lower inflation.

During the early part of the pandemic, when interest rates were historically low, banks became awash in deposits. For the two years beginning in March 2020, total deposits in the banking system swelled by 34% to $18 trillion.

When the Fed began moving those rates higher to cool the economy, customers who had deposits began seeking out places with higher yields. The first year-over-year deposit decline for all banks came at the beginning of the second quarter of 2022.

“Any talk of interest rates rising at this point causes people to think about whether their bank is the best place for their money,” Julia Hill, a University of Alabama law professor focused on banking, told Yahoo Finance.

US banks lost $472 billion in deposits in the first quarter, according to a quarterly report from the Federal Deposit Insurance Corporation (FDIC), which was the largest since the FDIC began collecting quarterly industry data in 1984 and marked the fourth consecutive quarter of industry outflows.

The biggest drops during that quarter belonged to certain regional banks. First Republic, for example, lost more than $100 billion and eventually was seized by regulators and sold to JPMorgan.

But some banks that lost deposits during the first showed some of the biggest increases in the second.

Western Alliance (WAL) and Zions (ZION) in Phoenix and Salt Lake City both showed a 7% increase in deposits. At First Horizon (FHN) in Memphis the gain was 6.4% and Comerica (CMA) in Dallas saw a 2% rise.

Western Alliance Bank signage is displayed on the Western Alliance Bancorp Headquarters in downtown Phoenix, Arizona, on April 27, 2023. - Shares in leading US banks, including JPMorgan Chase, were down in late morning trading in New York on Tuesday. Meanwhile those in regional banks suffered huge declines. Shares of PacWest Bancorp sank around 35 percent, while Comerica lost 13.6 percent. (Photo by Patrick T. Fallon / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)
Western Alliance was among the regional banks that gained back deposits in the second quarter. (Photo by PATRICK T. FALLON/AFP via Getty Images)

Even PacWest, a bank that came under intense scrutiny in the spring and agreed to merge with smaller rival Banc of California this past week, showed only a 1% decline in deposits after posting a 17% drop in the first quarter.

The most aggressive deposit rates currently offered are coming from smaller commercial banks, according to Ken Tumin, a senior analyst with LendingTree who runs an online resource called

Woburn, Mass.-based Northern Bank, the 353rd largest lender in the US with $2.8 billion in assets, currently offers a 5.6% interest on a one year CD.

“A lot of these midized banks in the last several months have been more and more aggressive with deposit rates, especially with CDs,” Tumin said.

This is not entirely good news for some of these smaller banks. By paying more, they are cutting into a key measure of profitability. A number of them revised down their estimates of revenue or lending profits for the rest of the year.

But if these banks don’t pay up, “they can just say goodbye to depositors,” said Yokum, the CFRA analyst.

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