In the first quarter of the year, deposits were more important than usual because the banking system as a whole saw customers move their cheaper (and what were supposed to be stickier) deposits into risk-free U.S. Treasury bills and higher-yielding bank account products. As a result, some banks in the U.S. collapsed after large-scale deposit runs during the banking crisis in March, although there were other reasons that led to their demise aside from just higher deposit costs.
But given the turmoil in the industry and the pressure on outflows and higher costs, investors were intensely focused on deposits as bank earnings season kicked off. With the big four money-center banks -- namely, JPMorgan Chase (JPM +0.76%), Bank of America (BAC +0.21%), Citigroup (C +0.23%), and Wells Fargo (WFC +0.94%) -- all having reported first-quarter earnings, let's take a look at which deposit franchise performed the best during the first quarter and the banking crisis in March.
Deposit flows and costs
The big thing that investors were focusing on in Q1 is deposit outflows, specifically among cheaper deposits, and what kind of funding sources banks had to replace these deposit outflows with. Investors also concentrated on how much deposit costs, which have a big impact on bank profitability, ultimately rose in the first quarter.
It was a complicated period for the large banks because they saw deposit outflows for most of the quarter until the banking crisis began in March, and then they actually experienced inflows since customers saw the largest banks (that they know to be "too big to fail") as a safe haven.
In the table below, I took a look at the decline in non-interest-bearing (NIB) deposits, which are deposits a bank pays no interest on, as well as the change in each bank's interest-bearing liability costs. I examined interest-bearing liability costs instead of just deposit costs because I wanted to incorporate the cost banks incurred from taking on higher-cost borrowings as well. The change in NIB deposits is on a period-end basis, while the cost of interest-bearing liabilities is on a quarterly average basis.
| Bank | Change in NIB Deposits in Q1 2023 | Cost of Interest-Bearing Liabilities Dec. 31, 2022 | Cost of Interest-Bearing Liabilities March 31, 2023 | Change in Funding Costs |
|---|---|---|---|---|
| JPMorgan Chase | $8.9 billion | 2.04% | 2.64% | 0.60% |
| Bank of America | ($25.6 billion) | 2.18% | 2.93% | 0.75% |
| Citigroup | $3.5 billion | 2.77% | 3.59% | 0.82% |
| Wells Fargo | ($23.1 billion) | 1.50% | 2.05% | 0.55% |
Data source: Bank earnings reports.
While JPMorgan Chase and Citigroup saw NIB deposit inflows, Bank of America and Wells Fargo experienced decent outflows in the first quarter. I found this to be quite interesting because (as I noted in a previous article toward the end of last year) Wells Fargo and Bank of America had far better deposit betas than JPMorgan and Citigroup. A deposit beta looks at how much a bank needs to raise its deposit costs in relation to the Federal Reserve raising its benchmark lending rate.
What could be happening is that banks that have actually built lower-cost deposit bases over the years, which are supposed to be stickier and less sensitive to interest rate hikes, are actually finding themselves to be a victim of their own success. For instance, Bank of America saw the largest amount of deposit outflows in Q1 in its consumer banking business. With interest rates now close to 5%, it's very difficult for consumers or small businesses earning next to nothing on their deposits to sit idle.
When you look at the change in deposit costs, Wells Fargo still outperformed JPMorgan in the first quarter, despite seeing much more in NIB deposit outflows. However, as I mentioned above, the banks only provide deposit costs on a quarterly average basis. Considering the banking crisis didn't hit until late in Q1, the average numbers may not be completely representative of what happened. JPMorgan did, however, outperform Bank of America on deposit costs, which is more of a rare occurrence.
Which bank performed the best?
Ultimately, I think it's clear that not only did JPMorgan perform the best on deposits but it actually was also the big winner in terms of earnings, at least among these four banks. Loan and securities revenue, as well as JPMorgan Chase's trading business, drove impressive Q1 results at the bank.
Whether JPMorgan can keep outperforming on deposits is a bit of a mystery. Executives noted that they saw about $50 billion of deposit inflows as a result of the crisis but they were very unsure as to the stickiness of those deposits, so that is going to be a big factor.
I also think that because the banking crisis took place so late in the quarter, the Fed is still raising rates, and past Fed rate hikes have yet to fully work their way through the economy, deposit costs are going to continue to rise in Q2 -- so the race is far from over.
