Credit Update:
Deposit Volatility Wanes but Funding Costs Still Pressuring Banks
Over a decade of low short-term rates led to complacency for depositors and banks with respect to deposits. The deposit crisis of March 2023 alerted the broader market to the slow burn of core deposits – outflows that preceded the frenzy – either slowly getting reallocated to higher yielding money markets or customers spending down saved stimulus.
Recent News
Banks Utilize Cautious Investment Approach
U.S. commercial banks were hesitant to deploy their cash into securities in the third quarter as securities fell 3.7% from the prior quarter, declining to 25% of assets from 26% the prior quarter, according to S&P Global Market Intelligence.
Recent News
CD Rates Fall Behind Fed Rate Hikes
As the Federal Reserve has moved short-term rates higher, the rate banks offer on their certificates of deposits has lagged significantly. Across the industry, the average rate for one-year CDs increased by 0.36% to 0.62% from September 2021 to September 2022. Large banks (>$250bn) led the way with an increase of 0.77% for one-year CDs over that period.
Recent News
Mortgage Rates Reach 13-Year High
In June, 30-year fixed mortgage rates hit 5.78%, the highest level since November 2008 and well above the 3.11% recorded near the end of last year. This is due to the Fed’s efforts to combat inflation by raising rates. A 6% mortgage rate isn’t high by historic standards as rates hovered between 5% – 7% during much of the decade before the financial crisis, but a return to more normal lending rates has slowed the residential real estate market.
Recent News
U.S. Banks Report Strong Loan Growth
Loan growth in the U.S. banking sector picked up substantially in the fourth quarter of 2021, setting up what executives say is a promising outlook for further increases in 2022. Total loans and leases at U.S. banks were $11.2 trillion at December 31, 2021, representing a 3.0% quarter-over-quarter increase according to S&P Global Market Intelligence data. That equates to an annualized growth rate of approximately 12.4%, significantly higher than the 3.5% median quarterly annualized growth rate since the end of the Great Recession.
Recent News
U.S. Bank Margins Rebound
After declining for ten straight quarters, U.S. bank margins rebounded in the third quarter. The banking industry’s aggregate net interest margin rose to 2.51% in the third quarter, up six basis points from the prior quarter. The industry’s loan yield rose to 4.34% in the third quarter from 4.25% in the second quarter but was down from 4.39% a year ago. Paycheck Protection Program (PPP) forgiveness bolstered yields on commercial and industrial credits, which jumped to 4.19% in the third quarter, up 29 basis points from the linked quarter and 71 basis points from a year earlier.
Recent News
Businesses & Consumers Report Stronger Loan Demand, Banks Await
A large majority of U.S. community banks reported year-over-year declines in loan balances in the second quarter. Loan growth has been largely suppressed across the industry as excess savings has translated to less need for credit by both consumers and businesses. While the rise in deposits typically translates to higher-yielding loan opportunities, a growing number of banks are coming to terms with the likelihood that at least a portion of the excess liquidity could become a long-term fixture on their balance sheets as margins are further compressed.
Recent News
US Banks Set Net Income Record, More Steam Ahead?
The US Banking industry set an all-time high in net income, which was 21% higher than the previous record set in the second quarter of 2019. Two transitory factors were largely at play during the quarter: negative provisioning (loan loss reserves being released, providing an earnings tailwind) and a widening discrepancy between loans and deposits, which has subsequently pressured Net Interest Margin (NIM).
Recent News
Banks Shift Deposit Composition Amidst Cost-cutting Efforts
Deposits have continued to build up on bank balance sheets, prompting banks to adopt differing strategies including setting balance limits for some individual commercial clients in an effort to minimize excess funding amid soft loan demand.
Recent News
U.S. Loan Portfolios Continue to Shrink
The decline in lending that began in May appears to have continued throughout the third quarter, with U.S. banks reporting that they have tightened underwriting amid weak demand for credit.