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Treasurers pull back deposits at top US banks as rates rise

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Corporate clients withdrew $70bn in deposits from JPMorgan, BofA, Wells Fargo and Citigroup amid Federal Reserve rate hikes and plans for quantitative tightening

by Anmol Karwal

Published: April 26th 2022

In the first quarter of 2022, corporations reduced deposits held at US banks by 2.5% or $70 billion to $2.4 trillion, the first reduction in almost thirteen quarters.

This comes at a time when treasurers find attractive yields in treasury securities which are pricing in the full expectations of the interest rate hikes by the Federal Reserve to tackle continued inflation, along with planned reductions in the Fed’s $7 trillion bond portfolio. Meanwhile bank deposit rates may only partially track Federal Funds rate increases in the coming quarters.

Lower returns on deposits

Since the Covid-19 pandemic struck, the largest US commercial banks including JP Morgan, Citigroup and Bank of America saw a $486 billion increase in corporate deposits as it surpassed the $2.6 trillion at the end of 2021. However, with short term interest rates near zero, corporates earned little return on their cash.

Now, as the Federal Reserve plans sharp increases in benchmark interest rates, treasurers reduced deposits in the first quarter of 2021.

Bank of America registered the largest decline in deposits, as corporate and commercial clients withdrew $22.5 billion from the bank, taking deposits 4% lower to $539.9 billion in the first quarter of 2022.

Citigroup also saw a $20 billion or 2.9% decrease in deposits within its Institutional Client business segment as corporate deposits stood at $664 billion at the end of the first quarter.

Corporate deposits at JP Morgan and Wells Fargo fell by $15.2 billion and $12.92 billion to $1.026 trillion and $169 billion respectively, during the same time period.

Treasurers are hesitant in keeping cash with banks which yields rock-bottom returns; this is mainly due to low deposit betas, which essentially means that banks pass only a small percentage of change in market interest rates onto their customers.

“The fact is it [deposit beta] won't be that much different, at least the first hundred-basis-point increase.” said Jaime Dimon, CEO at JP Morgan.

While banks don’t bifurcate the interest paid out to corporate customers, EuroFinance calculated the annualised companywide interest paid on interest-bearing deposits which stood at 0.04%, 0.09%, and 0.16% for Wells Fargo, JP Morgan and Bank of America, respectively.

Bank of America sought to downplay the $22.5 billion deposit reduction, insisting that most of the corporate cash it held was ‘operational deposits’ from smaller or middle market customers that were not sensitive to interest rates. “All the cash is money in motion for those commercial customers, meaning it's part of their daily cash flow”, CEO Brian Moynihan told analysts. “So it’s very stable”.

Meanwhile, Citigroup paid slightly higher interest of 0.8% as compared to other banks. The bank told investors that it anticipated corporate clients would demand a higher deposit beta in return for not jumping ship.

“We skew a bit more heavily toward the corporate client deposit base”, Citi CFO Mark Mason said. “That generally comes with a higher beta. They are likely to be more reactive to, and reactive sooner to the increase in interest rates.”

The opportunity cost of keeping cash in deposits is significantly high. Short-term treasury yields which incorporate the full expectation of the increase in interest rates are more attractive investments compared with deposits. One-year and two-year treasury securities yield 1.92% and 2.61%, respectively.

Based on the projections for federal funds rate by 2022, if cash withdrawn from deposits during the first quarter is invested in one-year treasury securities, EuroFinance estimates that corporates could earn an extra $872 million, assuming only 50% of the hike in interest rates will be passed on corporate customers.

Focus on Transaction banking

Despite the fall in deposits, transaction banking revenue at US banks continued its surge to $7.5 billion in Q1 2022, 4% or $290 million higher than the previous quarter.

This comes at a time when banks have been ramping up their digital offerings in a bid to generate operational efficiencies within treasury tasks including liquidity management, cross-border payments & receipts and international trade finance, etc and further pass on the benefit in terms of lower transaction costs for corporate clients.

In the first quarter, JP Morgan recorded its highest ever revenue of $2.835 billion from transaction banking, after a year in which the bank expanded its technology investments via fintech acquisitions. One reason for JP Morgan’s success is that its API services are much better than its competitors, treasurers say.

Citi’s transaction banking revenue also stood near all-time-high at $2.59 billion during the same time period.

“Our plans both in the near term, don't hinge upon significant growth in deposits… and we believe our strategy, which is broader than just going after deposits, but really is around solutions for corporate clients” said Mark Mason, CFO at Citigroup.

Meanwhile, transaction banking revenue at Bank of America stood at $2.088 billion, just $19 million higher than the previous quarter.