Rising Deposit Costs Pose Greater Challenges for Regional Banks in Coming Earning Reports

What factors were investors focusing on that led to their different attitudes towards large and small banks?

Interest-bearing deposit rates experienced a significant average increase of approximately one-fifth compared to the first quarter,despite the comparatively modest rise in the Federal Reserve's base interest rates during the second quarter. The rate at which deposit rates increased outpaced the rise in the average federal funds rate, displaying a notable acceleration.

It appears to be related to the phenomenon of deposit betas, which refers to the proportion of interest rate hikes that financial institutions need to transfer to their depositors. It is also an indicator of pricing power, where a lower deposit beta is more favorable for bank shareholders, while a higher deposit beta benefits customers.

State Street Corp unveiled its decision to absorb the complete effect of recent rate hikes, which has propelled its cumulative deposit beta to over 70% in the ongoing business cycle.

The trend of withdrawing funds from banks' non-interest-bearing deposits, commonly referred to as "golden" deposits, has persisted. State Street witnessed a 0.6% decline in its total deposits quarter-on-quarter, accompanied by a significant drop of over 20% in its non-interest-bearing deposits.

It does not indicate a worrisome scenario of deposit flight. The discrepancy between the decline in total deposits (2%) and non-interest-bearing deposits (20%) indicates that most of the cash remains with State Street, while highlighting the increasing cost of funds that is squeezing trust-bank profitability.

Affected by the addition of First Republic Bank's customers, JPMorgan's numbers have been excluded from the analysis. Overall deposits at the reporting banks decreased by 1% quarter-over-quarter, with non-interest-bearing deposits down over 7%. This has led to increased deposit costs, indicating slower cost growth than smaller bank.

Banks like JPMorgan, Citigroup, and Wells Fargo have identified several mitigating factors to counterbalance these deposit trends. Wells Fargo still holds nearly 30% of its deposits in non-interest-bearing accounts, such as customers'checking accounts. The major banks also increase their credit card lending, which has higher floating interest rates, to offset rising funding costs.