The growth of late first quarter brokered deposits at mid-cap US banks is likely to weigh on second quarter earnings and betas, being the measure of volatility facing an individual asset when compared to the market as a whole, analysts at UBS believe.
“Beneath the hood of deposit run-off/mix-shift for our coverage in 1Q was a resurgence of brokered deposit utilization, which increased to 10% of deposits on average for our coverage list from 7% in 4Q22,” they pointed out in a note to clients.
They highlighted that the majority of the brokered deposit growth is believed to have occurred in March following the failures of Silicon Valley Bank and Signature Bank.
As such, the cost of the deposits, which is estimated by the analysts to be between 4.75% and 5%, was not fully reflected in first quarter 2023 results.
“This dynamic sets our coverage list up to see increased betas and earnings pressure with 2Q results just from March brokered deposit growth alone, before factoring in increased core deposit costs and further mix shift,” they wrote.
They noted that, in this analysis, headwinds from brokered use were notable for Cadence Bank and SouthState Bank because they are two deposit franchises generally viewed as high quality/low beta.
They also wrote that the Federal Reserve’s rate hike pause which has pushed rate cuts out to 2024 could see banks look to start laddering out their funding bases via certificates of deposits (CDs) or borrowings.
In their coverage universe, they noted that First Citizens BancShares and New York Community Bancorp screen favourably for this type of environment.
“About 32% and about 17% of their respective interest-bearing liabilities (IBLs) having maturities greater than one year,” they noted.
“Beyond these names, we would highlight Bank OZK and Old National Bancorp favorably, both with about 14% of their IBLs having maturities over a year, versus the coverage list average of 4% to 7%.”
Further, the analysts believe that a regulatory emphasis on liquidity and wholesale funding may pressure deposit costs.
“In a challenging deposit gathering environment, we think increasing on balance sheet liquidity while keeping a leash on wholesale funding usage means greater pressure on deposit costs, particularly in CDs, as banks look to drive deposit growth in more traditional channels,” they wrote.
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