Deposit drain picks up, lending stays strong in Q4'22

Loan growth stayed hot in the fourth quarter of 2022 while seasonally adjusted deposit outflows accelerated, according to weekly data from the Federal Reserve, keeping attention focused on intensifying deposit price competition and a rotation toward higher-cost wholesale funding.

Total loans at U.S. commercial banks increased $265.15 billion, or 2.3%, from Sept. 28, 2022, to a seasonally adjusted $11.960 trillion at Dec. 28, 2022, according to the latest weekly data. The numbers imply continued strength despite swift interest rate increases by the central bank intended to cool the economy, although they represent a further slowdown from a blistering second quarter.

The growth was broad-based, with commercial and industrial balances up 2.3% and credit card loans up 1.9%. Nevertheless, analysts widely expect growth to decelerate further in the coming periods.

"Loan growth has sustained itself much longer than we would have figured given the weakening macro backdrop," Piper Sandler analyst R. Scott Siefers said in an interview. "But it seems almost inevitable that tailwind will sort of flag as we get further along into whatever downturn or recession is coming."

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Without seasonal adjustment, total deposits increased $112.81 billion, or 0.6%, to $17.912 trillion, though all of the increase was explained by higher large time deposits, which tend to be relatively expensive. Further, the period included the addition of $59.2 billion of deposits that appear to reflect the conversion to a commercial bank charter effected as a part of New York Community Bancorp Inc.'s completion of its acquisition of Flagstar Bancorp Inc. The same event drove an addition of $88.3 billion of assets, including $37.5 billion of multifamily commercial real estate loans.

After seasonal adjustment, total deposits were down $153.13 billion, or 0.9% to $17.763 trillion. That is a bigger drop than the decline of 0.4% from June 29, 2022, to Sept. 28, 2022, which roughly corresponds with the third quarter, and the decline of 0.3% from March 30 to June 29, which roughly corresponds with the second quarter.

The deposit flows reflect the Fed's efforts to withdraw pandemic-era stimulus and shrink its balance sheet at a pace of about $95 billion a month.

With loans up and deposits moving out, banks continued to reduce positions in cash and securities. Seasonally adjusted securities were down $152.21 billion, or 2.7% from Sept. 28, 2022, to $5.487 trillion at Dec. 28, 2022, and banks' cash assets fell $84.88 billion, or 2.7% to $3.087 trillion.

Overall, the balance sheet flows and the retreat in the pandemic surge of deposits appear to support analyst expectations that bank net interest margins are near a peak.

"You've got this mismatch between loans, which are still on an upward trajectory, and deposits, which are now leaving the system for the first time in recent memory," Siefers said. "It's very difficult now to foresee how we're going to fund everything so profitably."