State Street Tumbles as it Loses Key Deposits

(Yahoo!Finance) - The stock of State Street (STT) dropped more than 17% Monday morning as the giant Boston custody bank said net interest income, deposits and fee revenue dropped during the first three months of the year.

The market reaction was the latest sign of unease among investors as they examine how banks performed during one of the most tumultuous periods for the industry since the 2008 financial crisis. Banks of all sizes will be scrambling over the coming weeks to show they survived the chaos of the first quarter and are better positioned than rivals to weather any future turmoil.

State Street was not the only large bank in focus Monday. The stock of Charles Schwab (SCHW) initially fell 3% after it said it lost $41 billion in deposits in the first three months of 2023. The stock of a regional lender based in Buffalo, M&T (MTB), was initially down as much as 1.6% after it said net interest income and deposits dropped during the first quarter.

By 11:20 AM, M&T and Schwab were both up more than 2%. State Street's stock, on the other hand, was down 11%.

What is clear so far from the results is that net interest income—a key measure of profitability that shows the difference between what a bank earns on its assets and pays out to depositors—is emerging a key focus of this earnings season as investors fret about the future profitability of the industry.

The concern is that banks will have to pay more for deposits as interest rates rise and competition for customers intensifies, thereby reducing their margins. Depositors over the last year have been moving their money to higher-yielding options at money market funds, and those outflows only accelerated in March following the failure of Silicon Valley Bank.

Such a shift impacted State Street during the first quarter. Its net interest income was down 3% when compared to the fourth quarter of 2022, and its deposits fell by 5%. Flows into its money market funds increased.

The drop in net interest income was primarily due to lower balances of non-interest bearing deposits, a form of free funding where State Street pays no interest to customers. Those deposits fell to $39 billion from $44 billion.

State Street Chief Financial Officer Eric Aboaf told analysts he expects those deposits to drop by another $4-$5 billion in the second quarter before there is "some stabilization" and that that each drop of $1 billion costs the company $12-$15 million. Wells Fargo analyst Mike Mayo said in a worst-case scenario these deposits could fall to $30 billion, costing the company $200 million.

“If you’re calculating the worst case, I think you’re math roughly is correct. We’re doing all we can to avoid the worst case,” said CEO Ron O’Hanley. And, he noted, “there’s nothing that approaches a liquidity issue."

State Street's total fourth-quarter income of $549 million was down 9% from a year ago and 25% from the fourth quarter. Its earnings were worse than analysts expected. Assets under management in its investment division also dropped, and its fee revenue was down 1% from the fourth quarter and 9% from the year-ago quarter.

The results from Charles Schwab offered another look at how a firm at the center of last month’s banking crisis performed. Investors punished Schwab following the March 10 failure of Silicon Valley Bank as they looked for other institutions that could face an outflow of depositors or had sizable paper losses on their debt securities due to rising interest rates. Its stock dropped more than 30% in March.

The concern was that Schwab’s bank clients might move their money from “sweep accounts” into higher-yielding alternatives, and that could force the company to sell some of its bonds at a loss.

During the peak of the turmoil in March, Schwab felt compelled to come out publicly and reassure investors its liquidity remained strong. Its CEO Walt Bettinger told The Wall Street Journal the brokerage could continue to operate even if it lost most of its deposits over the next year “without having to sell a single security.”

On Monday he told analysts: “I would certainly hope that by this point in time, the short term driven speculation that we would find ourselves in a position where we would be forced to sell securities that have temporary paper losses has been put to bed."

Schwab ended the first quarter with $325 billion in deposits. That was down 11% from the fourth quarter and 30% from the year-ago quarter. But it was also roughly what analysts expected.

The brokerage giant also said first-quarter profit of $1.6 billion and revenue of $5.1 billion were down when compared to the fourth quarter but up from the first quarter of 2022.

By David Hollerith · Senior Reporter

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