Schwab and State Street report bank deposit outflows as savers seek higher returns

Big US financial groups Charles Schwab, State Street and M&T reported deposit outflows from their banking arms as investors continued to pull money out in search of higher returns.

Schwab said on Monday that deposits fell 11 per cent – or $41bn – in the first quarter and 30 per cent year on year. The broker, whose shares have plunged nearly 40 per cent since January, also paused share buybacks but reported better-than-expected adjusted earnings per share of 93 cents, up 21 per cent year on year.

Custody bank State Street’s shares opened down more than 15 per cent as quarterly profits missed expectations and fees were hit by subdued markets and reduced assets under management in its investment arm. Total deposits fell 5 per cent in the first quarter to $224bn.

State Street chief financial officer Eric Aboaf told analysts to expect another $4bn to $5bn of outflows of non-interest bearing deposits in the second quarter”. Every $1bn that leaves cuts $12m to $15m from its revenue, he said.

The results marked an anxious start to a week when investors are expecting to hear from dozens of regional and mid-sized banks. They will lay out the damage wrought by last month’s failures of Silicon Valley Bank and two other lenders on the broader financial system.

Last week, some of the US’s biggest banks, JPMorgan Chase, Wells Fargo and Citigroup, announced that they had taken in billions of dollars in deposits from customers fleeing smaller lenders following SVB’s collapse.

Analysts will be looking to see where that influx into big banks came from, and whether the outflows have stabilised. There are also concerns about the impact of much higher interest rates on banks’ loan books and securities holdings.

M&T Bank reported on Monday that total deposits had declined 3 per cent from $163.5bn at the end of 2022 to $159.1bn. The Buffalo-based lender did better than analysts had expected on net interest income, the gap between what it pays for deposits and charges for loans.

Schwab has been hit by “cash sorting”, where customers move money out of low-yielding bank deposit accounts into higher-yielding options such as money market funds, which can pay as high as 5 per cent on deposits.

Rates have risen so high that Schwab’s traditionally staid customer base of retail investors moved cash from its bank — which pays only 0.45 per cent interest on cash — at a clip that caught it off-guard and caused it to borrow expensively to cover the outflows.

“We’re not oblivious,” said Walt Bettinger, Schwab’s chief executive: “We know that we have driven much of what has gone on that has affected our near-term earnings.”

Bettinger said Schwab had also been contacting “clients of all sizes” to guide them on how to get the best rates for their cash, in essence, intensifying the rate of cash sorting.

“It’s the right thing to do,” he said. The movement of cash from bank accounts to money market funds “has been taking place predominantly inside Schwab”, he added. 

The amount of money in Schwab’s money market funds increased 150 per cent to $358bn from $143bn in the first quarter of 2022, and is up almost 30 per cent from the end of last year.

UBS analyst Brennan Hawken wrote that the Schwab results were “not as ugly as feared”.

At State Street, earnings per share of $1.52 were down 3 per cent year on year and missed consensus expectations. But revenue rose slightly year on year to $3.1bn, in line with analysts’ forecasts.

The huge custody bank said assets under management in its investment arm dropped 10 per cent to $3.6tn, reflecting both lower markets and net outflows. Like Schwab, it said its cash management products experienced inflows in March.

Chief executive Ron O’Hanley said the results “reflect the resiliency of our business model, notwithstanding continued interest rate increases and subsequent significant market movements, volatility and disruption within other parts of the banking industry . . . We expect revenue growth in the coming quarter.”

This article has been updated to correct the location of Charles Schwab’s headquarters

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