This Month in Retail Banking
- Accelerating deposit betas and funding-mix shifts weigh on the outlook for net interest income.
Perhaps more quickly than first anticipated, deposit betas accelerated in the first quarter, according to our account-level data and reinforced by anecdotal commentary from management. Meanwhile, even though total deposit outflows have been less than expected, negative shifts to deposit mix have become evident. Core deposits have declined, and non-interest-bearing outflows have accelerated. Retail deposits left on the books, however, remained stable while wealth and commercial deposits continued to display slightly higher churn and volatility.
- We’re moving increasingly from a liquidity event to one of profitability optimization.
Liquidity remains tighter across the system than in 2022, to be sure, but what had been a brewing crisis appears to be largely behind us. What’s changed is recognition of the issue and putting strategies in place to deal with a possible reemergence. Focus has now shifted to the bottom line, and most executives are alerting analysts to a probable contraction of earnings.
- Rising expenses are in the outlook for the balance of the year.
Continuing inflationary pressures and investments in technology will keep expenses on an upward trajectory this year, along with the ratcheting up of premiums for the Depositors Insurance Fund. These increases will be mitigated somewhat by further branch rationalization and more digital service delivery. To maintain operating leverage, banks will need a targeted plan for reinvestment that balances need-to-do activities with initiatives that enhance distinctiveness.
- The provision for credit losses is headed upward.
With loan losses continuing to normalize and non-performing assets occupying a growing portion of the balance sheet, banks are increasing their allowance for credit losses. No red flags of note have yet been assigned to specific asset classes, but the trend indicates an anticipation of declining loan performance for the balance of the year, especially within specific segments of commercial real estate.
- Profitability metrics are stalling in the face of revenue headwinds.
Compared to last year’s fourth quarter, first quarter’s profitability metrics are lower. But the headwinds stirred up by accumulated other comprehensive income (AOCI) have abated somewhat because rates rose only modestly during the first quarter. This improved the level of tangible common equity (TCE) through the quarter’s end, but trends have reversed into the second quarter. The growth of regulatory capital levels, on the other hand, was a mixed bag, with leverage ratios growing while the median Tier 1 ratio declined.