Bank Tracker: Deposit Data Debunks Conventional Wisdom; Plus Investment Banking, Fed Funds Futures

Deposit growth data debunks conventional wisdom. Astute readers may recall that banks attracted a measure of media attention a few months back. Bank runs at SVB, Signature, and First Republic gave rise to a new tenet of conventional wisdom: deposits share is shifting from community and regional banks to the too-big-to-fail cohort, dimming the prospects of smaller banks and nudging them to sell. It’s an elegant, intuitively appealing theory. The one, tiny objection we feel compelled to offer is that, based on the data, it isn’t actually true.

Reports of community banking’s death have been greatly exaggerated. Figure 1 lists banks that have reported earnings through Friday, ranked by total deposit growth in 2Q23. The median bank grew deposits by 0.7% (unannualized) during the second quarter. G-SIBs—banks that are semi-officially too big to fail—are highlighted in yellow. All of them posted deposit growth below the median. The best-performing bank on this metric was Bank OZK, a well-run bank with exceptionally astute leadership, but with total assets of just under $31 billion and a market cap of $4.8 billion, we foresee little risk of a G-SIB designation in their future. The top of the list is full of small and mid-sized banks that managed to outgrow the giants.

Non-interest-bearing deposit growth tells a similar story. In this environment, total deposit growth may be somewhat misleading. A bank that loses non-interest-bearing deposits only to replace them with 5% CDs may manage to post net deposit growth, but at the cost of devastating its margins. Non-interest deposits are the most valuable thing on most banks’ balance sheets. The data there is also unhelpful to the conventional wisdom, however. As shown in Figure 2, the median bank saw a 6.9% decline in non-interest-bearing deposits during 2Q23, reflecting the rising opportunity cost of leaving cash parked in non-interest-earing accounts. JP Morgan Chase was among the best performers, with deposits down just 1.1%, but that was the sole G-SIB above the median. The top of the list is mostly comprised of banks that you have probably never heard of, unless you trade them for a living, or happen to live near one.

Managerial acumen dominates size. There are, of course, lots of smaller banks at the bottom of both lists as well. That’s not surprising, however; nobody argues that community banks can’t fare poorly, and inevitably some will. The new conventional thesis is that they can no longer prosper, and that’s the one that fails to survive contact with reality. There are lots of small and mid-sized banks, and some will blow themselves up on rates or credit or both, but plenty will continue to prosper. The effects of size are dominated by the effects of managerial acumen.

Figure 1: Banks Ranked by 2Q23 Total Deposit Growth

Source: FactSet

Figure 2: Banks Ranked by 2Q23 Non-Interest-Bearing Deposit Growth

Source: FactSet

Investment banking mixed: equity underwriting up, M&A down (as expected). With the U.S. contingent of the bulge bracket having reported, overall investment banking fees were down 7% from last quarter and down 8% from a year ago. Equity underwriting was the notable exception, up 32% from Q1, while M&A was unsurprisingly down 23%.

New merger guidelines aren’t bullish. Away from earnings, last week saw another incremental negative for M&A in the form of new merger guidelines released for comment by the Justice Department and FTC. The magnitude of any impact is to be determined, but the guidelines appear to have at least some potential to institutionalize the more active approach that the current administration has taken toward anti-trust enforcement.

Blackstone does sound bullish, however. Blackstone’s Jonathan Gray sounded cautiously optimistic not just on M&A but more broadly: “Our expectation is you will see a pick-up in activity. The reason why is inflation, uncertainty makes it hard to do M&A and IPOs. We've got a lot of uncertainty around the banking issues, we've got uncertainty around inflation, and uncertainty in how far the Fed would go, and the contours of that looks a little more certain, and I think that's one of the reasons why markets are getting more enthused.”

Figure 3: Total Investment Banking Fees

Source: FactSet

Figure 4: Debt Underwriting Fees

Source: FactSet

Figure 5: Equity Underwriting Fees

Source: FactSet

Figure 6: Advisory Fees

Source: FactSet

Interest Rates

Fed funds futures continue to skew incrementally hawkish. Fed funds futures discount a near certainty of another 25 bp rate hike this week, but further out, the past week saw a slight incremental hawkish skew, with probabilities shifting slightly higher for the higher-longer rate scenario.

Figure 7: The Yield Curve Remains Inverted

Source: FactSet

Figure 8: Fed Funds Futures Imply a 94% Probability of a 25bp Hike at the July 26 FOMC Meeting

Source: FactSet

Figure 9: Fed Funds Futures Imply a July Hike, with the First Easing in March 2024

Source: FactSet

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