Updated Version 1 - Correction - U.S. banks see steady loan growth in Q3 but face tougher competition in the battle for deposits

Update to Tuesday’s report, supplemental U.S. banks’ performance data added in paragraphs 3, 4, 6, and the chart.

Pritam Biswas/Prakhar Srivastava

Reuters, October 14 - U.S. banks posted steady growth in loans and deposits for the third quarter, but in a competitive environment of persistently high interest rates, banks are incurring additional costs to retain customer funds.

Despite investor concerns that surging bond yields and persistently high borrowing costs will dampen loan demand and trigger deposit outflows, JPMorgan Chase JPM.N, Citigroup C.N, and Wells Fargo WFC.N all reported an increase in net interest income on Tuesday.

The second largest U.S. lender, Bank of America (BAC.N), also reported an increase in net interest income on Wednesday.

“The ongoing economic uncertainty and geopolitical unrest remain ever-present, but our customers’ actual behaviors continue to indicate that the U.S. economy is resilient and growing,” Bank of America CEO Brian Moynihan said in a call with analysts.

Citigroup reported that average deposits grew 11%, while average loans surged 12%. Wells Fargo stated that average deposits grew 10.7%, driven by its retail banking segment, and average loans also jumped 11%. JPMorgan Chase, the largest U.S. lender, reported a year-over-year increase of 4% in average deposits and 2% in loans.

In the third quarter, Bank of America’s average deposits rose 2%, while average loans and leases increased 6% compared to the same period last year.

https://www.reuters.com/graphics/PSP-PSP/PSP/akvelxngwpr/chart.png

Although key metrics are performing steadily, banks are under mounting funding pressure. As U.S. Treasury yields surged in the third quarter, customers increasingly sought higher returns elsewhere, forcing banks to raise deposit rates to prevent outflows—a move that squeezed their profit margins.

JPMorgan Chase’s deposit spread is a case in point: in the third quarter, this declined to 2.78% from 2.79% a year earlier; Wells Fargo’s taxable net interest margin also fell from 2.61% last year to 2.43% this quarter.

“Loan and deposit growth is still moving at a slow pace, even though there may be some concerns on the deposit side,” said Truist analyst Brian Foran.

Potential Credit Losses Become Focus

Analysts said overall credit quality at banks has yet to display material cracks, suggesting households are still managing their debts well.

A slackening labor market and rising cost of living could put pressure on borrowers, especially if prolonged conflicts push up the prices of essentials and squeeze discretionary spending.

Despite concerns that growth in consumer spending is simply the result of inflation squeezing out non-essential purchases, JPMorgan Chase CFO Jeremy Barnum said in a call with analysts that internal data does not show consumers are pulling back on purchases of discretionary goods.

For the 12 months ended August, the U.S. Consumer Price Index rose 3.4% (link), unchanged from July, while core inflation posted its biggest monthly increase in four months.

(link) Data shows U.S. job growth in September slowed much more than expected. Significant downward revisions to employment data in previous months have heightened market uncertainty about the economic outlook and the strength of future loan demand.

Wells Fargo and Citigroup increased their credit loss provisions in the third quarter, and given the current macroeconomic environment, other banks may soon follow suit.

In September, after the Federal Reserve raised rates—pushing up borrowing costs for consumers and businesses—major U.S. banks (link) raised their prime lending rates.

(To assist non-English speakers, Reuters automatically translates its reports into several other languages. Because automated translation may contain errors or may not include essential context, Reuters does not guarantee the accuracy of the translated text and provides the automated translation solely for the convenience of readers. Reuters takes no responsibility for any damage or loss caused by the use of the automated translation feature.)