The longer the Fed keeps rates on hold, the more incentive Americans have to move their money to higher-yield products.
US savers are finally wising up. Tired of the paltry interest rates they are getting on their checking and savings accounts, more Americans are moving their cash into higher-yield products, including certificate of deposit and money market funds. Some of these can pay interest rates of 5 per cent or higher, compared with an average of 0.08 per cent on a traditional interest checking account.
That’s bad news for Main Street banks, the biggest of which generated between 60 and 78 per cent of their total revenue from net interest income (NII) last year.
Between March 2022 and July 2023, the Federal Reserve raised its benchmark interest rate 11 times to a target range of 5.25 to 5.5 per cent, a two-decade high. While big banks were quick to increase credit card and mortgage rates, they were able to drag their feet in passing on the rises to savings customers. For that, they can thank consumer complacency. Most people find it a hassle to switch.
That inertia helped the four biggest US banks — JPMorgan Chase, Bank of America, Wells Fargo and Citigroup — deliver more than $253bn in combined NII in 2023, a record high.
But it is a feat that is unlikely to be repeated if second-quarter earnings are anything to go by. The longer the Fed keeps rates on hold, the more incentive savers have to move their money. Assets in US money market funds rose to a record $6.15tn earlier this month, according to the Investment Company Institute.
Banks are having to pay much higher rates to defend their deposit base, squeezing net interest margins. At Wells, NII for the June quarter fell 9 per cent year on year to $11.9bn, the lowest level in two years. Citi and BofA both reported a 3 per cent decline. JPMorgan managed to buck the trend with a 4 per cent gain. But even that is a slowdown from previous quarters.
Assets in US money market funds rise to record $6.15tn
For now, a Wall Street revival in investment banking and trading is helping Citi, JPMorgan and BofA offset some of the slowdown in NII growth. This should continue in the third quarter as companies look to do deals ahead of November’s high-stakes US presidential election.
Figuring out when NII will hit its trough will be tough. Shares in the four banks are up between 29 and 43 per cent over the past 12 months. With the exception of Citi, all are trading above book value. That is despite concerns over higher expenses, deteriorating credit quality and tepid loan growth. Expect the stocks to move sideways until the Fed starts cutting rates again.
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