Banks notch deposit growth in Q4'23, frame outlook for rate cuts

Banks reported modest deposit growth in the fourth quarter of 2023 as they encountered easing funding price pressures and began to set expectations for deposit cost reductions when the Federal Reserve cuts interest rates.

The median US public bank posted sequential deposit growth of 0.3%, according to earnings reports through Jan. 26 compiled by S&P Global Market Intelligence. The 20 largest by assets did a bit better with a median 0.4%, and the vast majority of those with at least $50 billion of assets added to securities holdings amid soft loan growth.

Funding costs continued to increase, helping to drive the median net interest margin (NIM) down by 6 basis points across the industry. That was considerably less compression than the preceding periods, however, with the median NIM down 50 basis points compared with the year prior.

"Deposit costs will continue to drift higher as long as rates remain high, but should begin to subside with Fed cuts," Jefferies analysts said in a Feb 4. report. "We anticipate NIMs to bottom in [the first quarter of 2024] for most banks."

Big banks

The 20 largest banks by assets also did slightly better than the broader industry in terms of NIMs, posting a sequential median decline of 4 basis points, in a deceleration in pressure after a median drop of 36 basis points over the year prior.

Some also offered guidance for deposit costs once the Fed cuts rates. PNC Financial Services Group Inc. said rates paid to consumer account holders could continue to drift up but predicted that rates for commercial and high net worth clients would drop fast.

Huntington Bancshares Inc. said competitors are beginning to change deposit strategies in anticipation of lower rates, though it does anticipate rising deposit costs until there is a Fed cut.

Truist Financial Corp. CFO Mike Maguire said to expect lagged pricing increases. Considering a hypothetical scenario of four consecutive cuts of 25 basis points each, the bank expects pressure for the first two from "guys still repricing up across the retail business and certain products and segments," Maguire said.

Idiosyncratic outflows

To be sure, trends varied across institutions, with some reporting sharp funding cost increases and others impacted by large seasonal shifts.

Total deposits were roughly flat sequentially at Columbia Banking System Inc., but the bank posted a sharp decline in non-interest-bearing deposits and an acceleration in pressure on its NIM that helped hammer its stock.

CVB Financial Corp.'s deposits declined 7.5% sequentially and 10.9% from the year prior. President and CEO David Brager said the bank typically has seasonal outflows of 4% to 6% in the fourth quarter reflecting factors like tax and bonus payments by customers, and the period also included "some unexpected deposit withdrawals that were directed to an external trust company for estate planning."

The bank reported that its percentage of non-interest-bearing deposits was still high at 63% as of the end of 2023 and that its cumulative beta — or the change in deposit costs as a percentage of the change in underlying short-term rates since the Fed started hiking in early 2022 — was still low at 11.2%. It also reported a $1.70 billion decline in deposits and customer repurchase agreements across the year, about $800 million of which had been moved to higher-yielding assets at its trust and wealth management unit.

Texas Capital Bancshares Inc. posted a sequential decline of $1.51 billion in total deposits in the fourth quarter, including a decline of $1.69 billion in non-interest-bearing deposits in its mortgage warehouse business, reflecting seasonal property tax payments from escrow accounts.

First of Long Island Corp. said that most of the 4.8% sequential decline in its deposits reflected seasonal outflows of municipal deposits that it replaced with wholesale funding, driving a sequential decline in its net interest margin of 13 basis points to 2%.

Securities and cash

The vast majority of banks with more than $50 billion of assets added to securities holdings sequentially, with a median increase of 1.7%. The group had been cutting securities amid a tough market for deposits, and the median increase over the year prior was 1.1%.

Across these banks, cash and equivalents fell by a median 7.5% sequentially but was up a median 22.9% over the year prior. Cash levels surged across the industry in the first quarter of 2023 as banks added liquidity amid the failures of Silicon Valley Bank and Signature Bank.

The Jefferies analysts anticipate muted securities growth as banks prioritize liquidity and a hoped-for rebound in lending.

"We expect securities yields to hold up better than other earning assets after the Fed pauses and eventually starts cutting," they said. "However, we still expect interest income from securities portfolios to decline from here for the majority of banks, as cash flows are generally not being re-invested today."