Tags: bank | deposit | JPMorgan | Wells Fargo

Deposit Deluge at JPMorgan, Wells Fargo Sinks Lending Margins

Wednesday, 15 Apr 2015 05:08 PM

JPMorgan Chase & Co. and Wells Fargo & Co. proved again that the largest U.S. banks can’t find enough productive uses for billions of dollars in customer deposits.

The lenders showed a further decline in net interest margin — the spread between what they make on loans and pay for funding — as they reported first-quarter results Tuesday and said higher deposit balances were mostly to blame. Wells Fargo’s margin dropped below 3 percent for the first time since at least 1994 and, at 2.95 percent, came in under the lowest estimate of five analysts surveyed by Bloomberg. JPMorgan’s fell to 2.07 percent.

The margin compression at two of the four largest U.S. banks provides additional evidence lenders are struggling under Federal Reserve policies that have pegged interest rates near zero since 2008. New York-based JPMorgan has told some clients it doesn’t want their deposits and while Wells Fargo said it would like more, the firm’s shrinking margins have drawn analysts’ scrutiny.

Deposit growth is “a great problem longer-term, but as long as rates stay low, it’s unfortunate because you have all this liquidity washing around with nowhere to go,” R. Scott Siefers, an analyst at Sandler O’Neill & Partners, said. “That’s problematic.”

Total deposits at San Francisco-based Wells Fargo climbed $28.4 billion from the fourth quarter to $1.2 trillion at March 31 and JPMorgan’s increased $4.46 billion to $1.37 trillion.

Portfolio Purchase

“We continued to strengthen our customer relationships in the quarter, as reflected in strong growth in deposits and primary checking customers,” Wells Fargo Chief Executive Officer John Stumpf said in a statement accompanying results.

Stumpf has taken steps to put deposits to work, including purchasing loan portfolios from competitors. Last week, the bank agreed to buy performing mortgages on commercial real estate valued at $9 billion in the U.S., U.K. and Canada from General Electric Co. as that firm decided to largely exit the business.

Lenders have also sought to separate customers into segments, with JPMorgan discouraging extra cash held in client accounts. Both firms have said they welcome deposits from consumers, considered more loyal and a cheaper source of funding, as well as a ready pool of buyers for other banking products.

Charging Clients

JPMorgan Chief Financial Officer Marianne Lake told analysts and investors Tuesday that firm’s actions should stabilize net interest margins. The bank plans to charge institutional clients such as hedge funds for certain deposits, according to a February memo.

“It’s been a significant increase in cash and we’re going to see some of that at least stabilize,” Lake said. “We should see our NIM relatively stable and again start to rise when rates rise.”

Customer-driven deposit growth accounted for more than half of Wells Fargo’s 9-basis-point decline, according to a presentation on the company’s website. Higher cash balances were the “primary driver” of JPMorgan’s 7-basis-point compression, the lender said Tuesday. A basis point is 0.01 percentage point.

With plenty of deposit funding, bank chiefs are awaiting Fed interest-rate increases, which will boost yields on securities and loans. The central bank will raise rates in the third quarter, according to the median estimate of 74 economists surveyed by Bloomberg.

Rising Rates

Until then, the largest lenders will probably face continued pressure on lending margins and questions from analysts and investors about whether more serious measures are necessary.

GE’s announcement last week that it planned to sell most of its lending businesses, spurred by higher capital requirements that hurt returns, should prove instructive to other large banks, said Gerard Cassidy, an analyst at RBC Capital Markets.

“In a rising rate environment, they will be able to generate higher” returns on equity, Cassidy, who’s based in Portland, Maine, said. “If they cannot earn their cost of capital, they may have to look at the approach that GE took on Friday.”

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JPMorgan Chase and Wells Fargo proved again that the largest U.S. banks can't find enough productive uses for billions of dollars in customer deposits. The lenders showed a further decline in net interest margin.
bank, deposit, JPMorgan, Wells Fargo
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2015-08-15
Wednesday, 15 Apr 2015 05:08 PM
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