American savers are finally starting to recognize the situation. Tired of the low interest rates they earn on their checking and savings accounts, more Americans are moving their money into higher-yielding products, such as certificates of deposit and money market funds. Some of these products can pay interest rates of 5% or higher, compared with the average 0.08% on a traditional interest account.
This is bad news for the major banks, the largest of which generated between 60% and 78% of their total revenues from net interest income last year.
The Federal Reserve raised its benchmark interest rate 11 times between March 2022 and July 2023, to a two-decade high of 5.25% to 5.5%. While major banks have been quick to increase credit card and mortgage rates, they have been slow to pass on the rate increases to savings customers. In that regard, they can thank customer loyalty, as most people find it difficult to switch.
That inaction helped the four big U.S. banks — JPMorgan Chase, Bank of America, Wells Fargo and Citigroup — rack up a record $253 billion in net interest income in 2023. But that achievement is unlikely to be repeated, if second-quarter earnings are any indication. The longer the Fed keeps rates stable, the more savers will have to move their money. Assets in U.S. money-market funds rose to a record $6.15 trillion earlier this month, according to the Investment Company Institute.
Banks have to pay much higher interest rates to maintain their deposit base, squeezing net interest margins. At Wells Fargo, net interest income for the June quarter fell 9% year over year to a two-year low of $11.9 billion. Citi and Bank of America each reported a 3% decline. JPMorgan bucked the trend, rising 4%. Still, even that was a slowdown from previous quarters.
Currently, a recovery in investment banking and trading services on Wall Street is helping Citi, JPMorgan and Bank of America offset some of the slowdown in net interest income growth.
That’s expected to continue in the third quarter, as companies look to strike deals ahead of the high-stakes presidential election in November. It’s hard to predict when net interest income will reach its lowest point. Shares of the big four banks have risen between 29% and 43% over the past 12 months. With the exception of Citi, all of them are trading above book value.
This comes despite concerns regarding rising spending, deteriorating credit quality and sluggish loan growth, and stocks are expected to move in sideways ranges until the Fed starts cutting interest rates once more.
The Shift in Savings: How Rising Interest Rates Are Impacting Banks
The Rise of High-Yield Savings Products
American savers are finally breaking free from the shackles of low interest rates. Fed up with earning pennies on their checking and savings accounts, more and more are turning their attention to higher-yielding options like certificates of deposit (CDs) and money market funds. These products can boast interest rates of 5% or even higher, a stark contrast to the meager 0.08% average offered by traditional interest accounts.
A Blow to Bank Profits
This shift in savings behavior spells bad news for major banks, whose income is heavily reliant on net interest income. For instance, the top banks generated between 60% and 78% of their total revenue from net interest income in 2023.
The Federal Reserve’s aggressive interest rate hikes, reaching a two-decade high of 5.25% to 5.5% by July 2023, have put banks in a bind. While they’ve swiftly increased credit card and mortgage rates, they’ve been slower to pass on those hikes to savings account holders.
This reluctance, fueled by customer inertia and the difficulty of switching banks, has allowed the four big U.S. banks—JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup—to rake in a record $253 billion in net interest income in 2023.
The Rising Tide of Capital Flows Away from Banks
However, this windfall is unlikely to be repeated. The longer the Fed keeps interest rates steady, the more savers will be incentivized to move their money. Assets in U.S. money market funds reached a record $6.15 trillion earlier this month, a clear indication of this trend.
To protect their deposit base, banks are being forced to offer higher interest rates, squeezing their net interest margins. Wells Fargo’s net interest income for the June quarter dropped 9% year over year to a two-year low of $11.9 billion. Citi and Bank of America both reported a 3% decline. JPMorgan bucked the trend with a 4% increase, but even that represented a slowdown from previous quarters.
Finding a Lifeline in Investment Banking and Trading
Thankfully for these banks, investment banking and trading services on Wall Street are experiencing a resurgence, helping to offset the slowdown in net interest income growth for Citi, JPMorgan, and Bank of America.
This trend is expected to continue into the third quarter as companies rush to finalize deals before the high-stakes presidential election in November.
Uncertainty Looms
However, the future remains uncertain. It’s unclear when net interest income will bottom out, and concerns regarding rising spending, deteriorating credit quality, and sluggish loan growth continue to linger. Despite this, shares of the big four banks have climbed between 29% and 43% over the past 12 months. All but Citi are trading above book value.
The outlook for these banks will likely remain in a sideways range until the Fed signals a shift toward interest rate cuts.
Shifting Savings Landscape: A New Era?
The current landscape suggests a fundamental shift in the relationship between banks and savers. The days of relying on customer inertia and low interest rates may be coming to an end. Banks now face the challenge of adapting to a more discerning and empowered customer base that demands competitive interest rates and innovative financial products.
Ultimately, the success of banks in this new environment will hinge on their ability to balance the need for profit with customer satisfaction.
Impact on the Economy
The shift in savings patterns might also have implications for the broader economy. The surge in money market fund assets suggests investors are increasingly cautious and seeking safety in liquid assets. This might lead to a slowdown in economic growth if businesses find it more difficult to secure loans for expansion.
This trend, along with other factors, makes it crucial for the Fed to carefully manage interest rates and ensure a smooth transition to a more stable economic environment.
Tips for Savers
With the interest rate landscape in flux, savers should consider the following to maximize their returns:
- Shop Around: Don’t settle for the first bank you find. Compare interest rates and fees offered by different institutions.
- Consider Alternatives: Explore higher-yielding options such as CDs, money market funds, and high-yield savings accounts.
- Diversify: Don’t put all your eggs in one basket. Spread your savings across different products and institutions to reduce risk.
- Monitor Your Investments: Regularly review your investments to ensure they’re still meeting your financial goals.
Table 1: Average Interest Rates for Savings Accounts
| Bank | Average Interest Rate |
|---|---|
| Bank of America | 0.01% |
| JPMorgan Chase | 0.02% |
| Wells Fargo | 0.03% |
| Citigroup | 0.05% |
Note: Interest rates may vary based on account balance and other factors.
The shift in savings behavior represents a significant change for banks and savers alike. As interest rates remain elevated and savers become more demanding, the industry will need to adapt to a new reality. This shift might also have ripple effects on the broader economy, highlighting the need for policy makers to carefully navigate the evolving landscape.
