The banking sector faced an unusually challenging year, as evidenced by a recent report from S&P Global Market Intelligence. According to S&P Global, total deposits in U.S. banks witnessed a substantial 4.8% drop, equating to $872 billion, bringing the total to $17.27 trillion as of June 30. This decline marks the first instance of such a decrease since 1994.
Key takeaways about banking challenges
- The banking sector faces a challenging year, per the S&P Global Market Intelligence report.
- Total U.S. bank deposits dropped by 4.8% ($872 billion), totaling $17.27 trillion by June 30.
- S&P Global report analyzes Federal Deposit Insurance Corp data, highlighting banks' changing business landscape.
- Schwab faces challenges as customers withdraw deposits for money market funds, impacting earnings.
- JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup contribute to nearly 30% of industrywide deposit decline.
- Bank of America's market share drops by 3 basis points to 10.93%, with deposits down by 5% to $1.888 trillion.
- S&P Global reports a continued reduction in brick-and-mortar bank branches, decreasing from 79,172 to 77,796 in the prior year, significantly lower than the 96,339 branches in 2013.
Among the top 15 deposit-holding institutions, Charles Schwab recorded the most significant year-over-year decline, with deposits decreasing by 31.1% to $304.79 billion. S&P Global attributes this decline primarily to the outflow of funds from brokerage accounts.
The S&P Global report, analyzing data from the Federal Deposit Insurance Corp, underscores the dramatic shift in the business landscape for banks over the past year. The Federal Reserve reacted to record-setting inflation by aggressively raising interest rates. As a result, Americans have been transferring their funds from low-yield bank accounts to higher-yielding alternatives, such as money market funds.
This transition has posed a unique challenge for Schwab (ticker: SCHW). Although Schwab is most renowned for its brokerage platform, it also maintains a substantial bank segment, channeling customers' uninvested funds into low-yield bank accounts. As the data indicates, customers have been withdrawing their deposits to invest in money market funds, often using Schwab's platform. This process, known as cash sorting, has exerted pressure on Schwab's earnings. When the company's outflows surpass its available cash, it must resort to expensive solutions like loans from the Federal Home Loan Banks system.
Schwab's stock experienced a significant drop during the regional bank crisis in March, driven by concerns over cash outflows. The stock remains down by approximately 33% this year. Company executives have noted that the cash sorting situation has been improving. A Schwab spokesperson encouraged clients to consider transferring long-term cash balances to higher-interest-yielding options.
While Schwab's bank division appears to have weathered the storm, three smaller banks—First Republic Bank, Silicon Valley Bank, and Signature Bank—succumbed to the pressure earlier this year.
The majority of large U.S. banks reported declines in their deposit balances year-over-year, with nearly 30% of the industrywide decline attributed to JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, according to S&P Global.
Despite JPMorgan (JPM) acquiring First Republic on May 1, its total deposits declined by 2.8% year-over-year, reaching $2.07 trillion as of June 30. JPMorgan remains the largest deposit holder in the country for the third consecutive year, with its market share increasing by 24 basis points year-over-year to 11.98%, according to S&P Global.
Bank of America (BAC), the largest U.S. bank by total deposits in 2020, witnessed a 3 basis point decrease in market share to 10.93%, according to S&P Global. Bank of America's deposits dwindled by 5% to $1.888 trillion in the past year through June 30.
S&P Global also reported a continued reduction in the brick-and-mortar presence of the banking industry, with the number of bank branches decreasing from 79,172 to 77,796 in the prior year. This is a substantial drop from the 96,339 branches recorded in 2013.
Source: Barrons
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