As early as third quarter 2022 earnings, bank investors were becoming concerned about how rapidly rising rates would impact bank net interest income. But while there was continued uncertainty around deposit outflows and betas, interest income was rapidly increasing for many banks.
While few institutions faced hard questions, for the industry overall there was a general sense of calm. It has become clear it preceded a very harsh storm. First quarter earnings releases in less than four weeks will likely play a large part in determining whether that storm continues to strengthen — as well as which institutions will find shelter from it.
The innings of the deposit crisis explained
Over the past few weeks, we’ve quickly cycled through the impact of the early innings of what is likely to be a transformational period for regional and community banking in the United States. To quickly recap:
• Inning 1: Venture-backed clients reduced deposit balances as funding tightened
• Inning 2: Rate-sensitive clients moved deposit balances as alternative yields heightened
• Inning 3: Panic-driven clients rapidly re-located deposit balance as potential failure frightened
While many banks were well-positioned to manage through innings 1 and 2, nearly all banks have been materially and unexpectedly impacted by inning 3. A large number of banks have unfortunately been damaged by otherwise-stable clients deciding to migrate balances to larger institutions. A small number of banks have been the beneficiary of those migrations. And quite a few banks have experienced both impacts in different parts of their portfolios.
The result is that the whole industry faces challenges and opportunities across deposit management, characterization, forecasting, and associated asset-liability management. Absent a sudden escalation of the crisis in the days ahead, we believe the next three innings will play out over the next six weeks:
• Inning 4: Recovery, retention, and growth
• Inning 5: First quarter earnings
• Inning 6: The new normal (or, in a worse case, back to inning 3)
The middle innings will be crucial. US banks that have not been beneficiaries have less than four weeks to both minimize the damage already done and prepare to explain how well they are positioned for the future. Investors were already growing frustrated with deposit forecasting even before the crisis erupted; now they are unlikely to be as patient or as forgiving as they had been.
Clearly, the best case for all banks would be a better-than expected financial result: Lower-than-feared deposit runoff and higher than expected increases in net interest income. The worst case would be less robust results combined with an inability to clearly explain the lasting implications of each of the first three innings for future stability and performance.
The report also covers the following key areas, download it now to learn more, and to meet our deposits experts:
• A brief overview of how we got here, from a deposit management perspective
• Opportunities to maximize deposit recovery retention and growth
• Approaches to explaining the impact of innings 1, 2, and 3 to investors