Banks Losing Net Interest Income as Big Deposits Look Elsewhere

America’s banks are under increasing pressure as their corporate and institutional clients seek greater rates on deposits.

It’s a situation that is putting a strain on banks’ profit margins and a sign that lenders will have a tougher time generating revenue as monetary policies tighten, the Financial Times noted in a report Wednesday (July 13).

As that report says, rising interest rates have allowed banks – larger ones especially – to boost what they charge for loans, leading to increased net interest income (NII). But that trend has begun to shift as institutional clients move funds from non-interest-bearing accounts to those that offer a better yield while also demanding higher rates more broadly.

Among the financial institutions dealing with this issue is State Street, the report says, which last week warned that the 10% decline in NII in its most recent quarter would be followed by an additional drop of 12% to 18% in the next quarter.

CEO Ron O’Hanley predicted other banks would find themselves in the same boat as customers increasingly seek better returns from digital banks or money market funds.

“Everybody is being pressed on their NII . . . how quickly and how much is a function of the nature of their deposits,” O’Hanley said.

He added that his bank had faced this issue earlier than others because it had “sophisticated clients and they obviously want to make some money on their deposits, which they weren’t able to do for many, many years.”

Meanwhile, banks are also facing more stringent capital requirements from the Federal Reserve, a shift that — as PYMNTS wrote earlier this week — may allow FinTechs to gain more lending business from consumers and companies as they transition to a relatively newer corner of financial services to access the capital they need.

The Fed’s new proposal would require banks with at least $100 billion in assets on the books to have an additional 2% of capital — which in turn, means that $2 for every $100 in assets would be held back.

“As to the ripple effects, holding more capital means that banks have more in the coffers to deal with exogenous shocks,” PYMNTS wrote.

“But the more money that is held back, the less money there is to lend into the general financial system. And to generate at least some of the profits that would otherwise be lost by keeping more capital in reserve, banks might opt to hike rates.”