NEW YORK (Reuters) - Big banks are making a lot less money from their deposits than they did before the coronavirus pandemic.
Net interest income, the difference between what banks pay for money and what they receive lending it out, fell by $5 billion, or 10%, at the four biggest U.S. banks in the second quarter from a year earlier.
The plunge came after the Federal Reserve pushed down overnight interest rates in March to near zero to support the economy’s struggle against the coronavirus pandemic.
With rates down on loans and securities, the banks earned less investing their deposits. JPMorgan Chase & Co, (JPM.N) for example, reported that its net interest spread from consumer deposits fell to 1.52% in the second quarter, from 2.60% a year earlier when the Fed benchmark was 2.25%.
Bank of America Corp (BAC.N), which boasts the most consumer deposits of U.S. banks, said profits from consumer deposits fell to $785 million from $2.2 billion a year earlier.
“Those deposits aren’t as valuable in a lower-rate environment,” Chief Financial Officer Paul Donofrio told analysts. “You’re now seeing us getting hurt.”
After the COVID-19 outbreak, banks were flooded with new deposits. But they were reluctant to invest the money for fear individuals and businesses would quickly take it back. Bank of America said it put the money into cash and cash-like accounts earning a bare 0.1%.
“The place we’re uncertain is the large cash inflows from corporate customers,” Bank of America’s chief executive, Brian Moynihan, told analysts.
Once bank executives have a better sense of the path of the pandemic and whether deposits will stay, they will shift some into higher-yielding securities, Donofrio said.
Bank analyst David Hendler of Viola Risk Advisors said loan growth isn’t much of an option given weak demand and credit risks. “Their margins are squeezed and they don’t have many levers to pull,” he said.
Reporting by David Henry in New York; Editing by Leslie Adler