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Shares in State Street, the global custody bank, fell 10 per cent on Friday, the largest drop since the early days of the pandemic, after it warned that it was having to pay higher interest rates to customers to retain deposits.
While other big banks are still reporting increases in the profit they make from charging more for loans than they have to pay out for deposits, State Street’s net interest income dropped by 10 per cent quarter on quarter to $691mn.
“NII is no longer a tailwind,” chief executive Ron O’Hanley told analysts.
State Street, which also has a large fund management business, narrowly beat analysts’ consensus expectations with net income of $763mn, up 2 per cent year on year as assets under management rose 9 per cent to $3.79tn. But that was overshadowed by concerns about deposits and interest income.
Shares were down almost 10 per cent in early-afternoon trading in New York.
Deposits also fell by $1.3bn, or 0.6 per cent quarter on quarter to about $222bn, after a 5 per cent drop in the first quarter. The decline was particularly stark for non-interest bearing deposits, which were down 20.5 per cent from March 31, with another $5bn in outflows expected in the third quarter.
State Street clients tend to be large institutions, which are particularly sensitive to rate changes. They are more likely to move their money or demand higher interest rates than the retail customers who make up a large part of the deposit base at most US banks.
“We have sophisticated large clients coming back and saying, look, some of our . . . rate levels are something that they’d like us to adjust,” chief financial officer Eric Aboaf said on the analyst call.
He said that what the bank describes as a “catch up” in the deposit book will peak in the next few months before it starts to moderate by the end of the year. State Street recorded receiving $766mn in net interest income in the first quarter, but now expects it to settle back below $600mn per quarter.
Compounding the problem for State Street, it gave downbeat guidance on fees for the third quarter, with asset servicing fees expected to drop by 1-2 per cent, and revenue from front office software to fall 7 per cent.
O’Hanley argued that State Street was well positioned to recover longer term with its cost control and efforts to grow its Alpha technology platform. “We’re actually quite optimistic over what I would call the short to medium term as we look into 2024 and the revenue picture.”
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