Regional Banks' Net Interest Income Challenges Amid Rising Deposit Costs

Impact of Rising Deposit Costs on Net Interest Margins

Rising deposit costs have led to a decline in net interest margins for regional banks. Wells Fargo, Regions Financial, and Truist Financial all reported decreased net interest income due to higher funding costs and customers shifting to higher-yielding deposits. U.S. Bancorp and JPMorgan Chase also noted margin compression from elevated deposit levels and higher rates paid.

"Turning to Slide 4. Net interest income declined $1.1 billion or 8% from a year ago due to the impact of higher interest rates on funding costs, including the impact of customers migrating to higher yielding deposit products as well as lower loan balances, partially offset by higher yields on earning assets." --- (WFC, earning call, 2024/Q1)

"The decreases in net interest income and net interest margin were primarily driven by increases in deposit and funding costs due to market interest rates, including the impact of deposit remixing." --- (RF, sec filing, 2024/Q1)

"Interest-bearing deposit costs increased 7 basis points sequentially to 2.89%, which also resulted in a 1% increase to our cumulative total interest-bearing deposit beta cost, up 54%. Moving to net interest income and net interest margin on Slide 12." --- (TFC, earning call, 2024/Q2)

"Elevated deposit levels and higher on-balance sheet liquidity drove a 3 basis point decline in net interest margin this quarter to 2.67%. Slide 11 highlights trends in noninterest income." --- (USB, earning call, 2024/Q2)

"Net interest income was $13.7 billion, up 7%, driven by: • higher Card Services NII, reflecting an increase in revolving balances, and • the impact of First Republic in Home Lending, partially offset by • deposit margin compression, reflecting higher rates paid and lower average deposits in Banking & Wealth Management ("BWM")." --- (JPM, sec filing, 2024/Q1)

Role of Interest Rate Changes on Net Interest Income

Interest rate changes significantly impact net interest income, with regional banks like Truist Financial and U.S. Bancorp noting stability and potential growth. JPMorgan Chase highlights earnings-at-risk scenarios and sensitivity analyses, while Wells Fargo discusses the dynamics of interest-bearing accounts and pricing, all underscoring the critical role of interest rates.

"(2) Yields are stated on a TE basis utilizing federal tax rate. The change in interest not solely due to changes in rate or volume has been allocated based on the pro-rata absolute dollar amount of each." --- (TFC, sec filing, 2024/Q1)

"Earnings-at-risk scenarios estimate the potential change to a net interest income baseline, over the following 12 months utilizing multiple assumptions." --- (JPM, sec filing, 2024/Q1)

"So to boil that all together, we -- what we do see now with our guidance is that we have the second quarter net interest income will be relatively stable, and we should see growth in the second half of the year." --- (USB, earning call, 2024/Q1)

"You talked about the mix shift and non-interest down and interest bearing up, but just wondering just what's happening on the pricing side and are you still seeing both sides, consumer and wholesale, if you can maybe just kind of give us the dynamics that's happening underneath and how you expect that to continue as we get to this, as we stay in this rates peak?" --- (WFC, earning call, 2024/Q1)

"It is presented as a sensitivity to a baseline, which includes net interest income and certain interest rate sensitive fees." --- (JPM, sec filing, 2024/Q1)

Competitive Pressures in Attracting and Retaining Deposits

Regional banks face significant competitive pressures in attracting and retaining deposits due to Federal Reserve policies, ongoing interest rate environments, and corporate clients adjusting balances. However, some banks, like Regions Financial, leverage a granular deposit base as a competitive advantage.

"But deposits continue to be pretty much in a flat pace and that's in large part to the Federal Reserve's quantitative tightening, policies that's putting, pressure on deposits and and cash balances within the industry." --- (USB, conference, 2024/05/07)

"But certainly, we still do expect to have some balanced pressures on like core client deposits so long as we stay where we are from a rates perspective." --- (TFC, conference, 2024/06/11)

"But so our competitive advantage is our deposit base. It's a very granular deposit base with 4,500,000 customers centered on consumer, which is 2 thirds of our deposits." --- (RF, conference, 2024/06/12)

"Just given the sheer amount of, I guess, investor questions that we've received on the deposit pricing changes in wealth, I was hoping you could provide some additional context given many of your peers have talked about cash sorting pressures abating, or at least being in the very late innings." --- (WFC, earning call, 2024/Q2)

"So we have corporates that are as rates have stayed up higher, they've actually continued to fine tune their movement because the earnings credit rate, which the rate we give people for deposit balance in which they pay for services, stays up a little higher, so they can lower the balances on that side and put it more in sort of at the market pricing side." --- (BAC, conference, 2024/05/30)

Strategies to Manage Rising Deposit Costs

Regional banks are employing various strategies to manage rising deposit costs, including optimizing the spread between cash and securities yields and deposit rates, increasing cash balances through FHLB utilization, leveraging security portfolio turnover, and planning for deposit share growth. Additionally, maintaining a consistent deposit pricing strategy is crucial.

"The balance that we try to strike, you can sort of see in the left-hand side - we’re trying to make sure that that cash and securities yield compared to the deposit rate paid performs in any environment, so in an environment like this one, where there’s an awful lot going on with rates, we feel like if you look at that spread, I think it was one basis point different quarter-over-quarter, so we’re trying to make sure that we lock in the value, monetize the deposits regardless of whatever the rate environment turns out to be, and we feel like we’re pretty balanced now." --- (BAC, earning call, 2024/Q1)

"The balance with the Federal Reserve Bank is the primary component of the balance sheet line item “interest-bearing deposits in other banks.” At March 31, 2024, Regions had approximately $8.7 billion in cash on deposit with the Federal Reserve Bank and other depository institutions, an increase from approximately $4.2 billion at December 31, 2023, driven by FHLB utilization in the first quarter of 2024 in order to optimize collateral and increase cash balances." --- (RF, sec filing, 2024/Q1)

"The security portfolio turnover, the increased yield on the new purchases, modest loan growth and deposit migration slowing, all those things lead us to the Yes." --- (USB, conference, 2024/05/30)

"Over time, we expect continued deposit share growth and have real plans to get to 15% deposit share with no intention of stopping there." --- (JPM, event transcript, 2024/05/20)

"But if you remember, part of our deposit pricing is never going to move to zero." --- (BAC, earning call, 2024/Q2)

Regulatory Impacts on Net Interest Income

Regulatory changes, such as Basel 3 capital requirements and heightened oversight, significantly impact regional banks' net interest income by influencing interest rate risk management and market risk exposure. These regulations can either mitigate or exacerbate net interest income fluctuations, depending on the regulatory environment and compliance progress.

"Distribution of Daily Backtesting Gains and Losses Structural interest rate risk management The effect of interest rate exposure on the Firm’s reported net income is important as interest rate risk represents one of the Firm’s significant market risks." --- (JPM, sec filing, 2024/Q1)

"Under instantaneous upward parallel shifts, the near-term adverse impact to Basel 3 capital would be reduced over time by offsetting positive impacts to net interest income generated from the banking book activities." --- (BAC, sec filing, 2024/Q1)

"But externally, investors are clearly spending much more time evaluating the different potential sources of earnings or return uplift once these regulatory restrictions are eliminated, whether it's deposit recapture, growth in trading book and reduction in that elevated risk and control spend." --- (WFC, earning call, 2024/Q1)

"Other sensitivity-based measures The Firm quantifies the market risk of certain debt and equity and credit and funding-related exposures by assessing the potential impact on net revenue, other comprehensive income (“OCI”) and noninterest expense due to changes in relevant market variables." --- (JPM, sec filing, 2024/Q1)

"While we see clear forward momentum, it's up to our regulators to make their own judgments and decide when the work is done to their satisfaction. Progress has not been easy, but tens of thousands of my partners at Wells Fargo have now worked tirelessly for years to deliver the kind of change necessary for a company of our size and complexity, and we will not rest until we satisfy the expectations of our regulators and the high standards we have set for ourselves. While we have made substantial changes and have meaningfully improved our control environment, the industry operates in a heightened regulatory oversight environment, and we remain at risk of further regulatory actions." --- (WFC, earning call, 2024/Q2)