By The year has been exceptionally challenging for banks, as highlighted in a new report by S&P Global Market Intelligence. The report reveals a significant decline in total deposits across U.S. banks, marking the first decrease since 1994.
Deposits Take a Hit
According to S&P Global, total deposits plummeted by 4.8%, amounting to a staggering $872 billion drop to reach $17.27 trillion as of June 30. Within the top 15 deposit holders, Charles Schwab experienced the largest year-over-year decrease in deposits, with a substantial decline of 31.1% to $304.79 billion. This decline primarily resulted from outflows from brokerage accounts.
The Changing Landscape
The comprehensive S&P Global report, analyzing data from the Federal Deposit Insurance Corp, underscores the significant transformation of the banking industry in recent times. In an attempt to combat record-setting inflation, the Federal Reserve has aggressively raised interest rates. Consequently, as rates increased, Americans shifted their funds from low-paying bank accounts towards alternative options with higher yields, such as money market funds.
Schwab’s Unique Predicament
The process of customers moving their money from low-paying bank accounts to money market funds has particularly affected Schwab (ticker: SCHW). While Schwab is renowned for its brokerage platform, it also operates a substantial bank that funnels customers’ uninvested cash into modestly yielding bank accounts. As illustrated by the data, customers have been withdrawing their deposits to invest in money market funds, often on Schwab’s own platform. This practice, known as cash sorting, has exerted significant pressure on Schwab’s earnings. In instances where outflows surpass available cash, the company has resorted to costly measures such as securing loans from the Federal Home Loan Banks system.
All in all, banks have faced unprecedented challenges throughout this turbulent year, grappling with changing customer preferences and a volatile financial landscape. The decline in total deposits serves as a stark reminder of the shifting dynamics within the banking sector.
Schwab’s Stock Plunges During Regional Bank Crisis
Schwab’s stock experienced a significant drop during the regional bank crisis in March, which caused concern among investors regarding cash outflows. As a result, the stock has remained down approximately 33% this year. However, executives from Schwab have reassured that the situation is improving, with cash sorting becoming less of an issue. In fact, a company spokeswoman stated that Schwab encourages clients to consider moving their long-term cash balances into investments that offer higher interest rates.
Smaller Lenders Collapse While Schwab Weathers the Storm
While Schwab seems to have successfully navigated through the crisis, three smaller lenders did not fare as well. First Republic Bank, Silicon Valley Bank, and Signature Bank all collapsed earlier this year.
Large U.S. Banks Witness Decline in Deposit Balances
The majority of major U.S. banks have experienced declines in their deposit balances compared to the previous year. S&P Global reports that almost 30% of the industrywide decline can be attributed to JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup.
JPMorgan’s Total Deposits Decrease, but Market Share Rises
Although JPMorgan purchased First Republic on May 1st, its total deposits have fallen by 2.8% year-over-year, reaching $2.07 trillion as of June 30th. Despite this decline, JPMorgan remains the largest deposit holder in the country for the third consecutive year. Its market share even saw a 24 basis points increase to reach 11.98%, according to S&P Global.
Bank of America’s Market Share Drops, Deposits Decrease
Bank of America, which held the title of the largest U.S. bank by total deposits in 2020, experienced a decline in market share by 3 basis points, now standing at 10.93%, according to S&P Global. Additionally, Bank of America’s deposits dropped by 5% to $1.888 trillion over the past year through June 30th.
Banking Industry Continues to Decrease Physical Locations
S&P Global reveals that the banking industry is still reducing its brick-and-mortar footprint. The number of bank branches has decreased from 79,172 to 77,796 compared to the previous year and down significantly from 96,339 in 2013.
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