Banking’s Fantastic Four Grab a Bigger Share of Industry Profits

They’re too big to fail — or even have a bad quarter.

Of the roughly 4,400 operating banks in the US, nearly half of all banking profits in the third quarter came from a cadre of just four — JPMorgan, Citigroup, Wells Fargo, and Bank of America — according to data from BankRegData and reported by the Financial Times this weekend. Thank inflation, Jerome Powell, and this spring’s run on regional banks.

The Big Get Bigger

Banking industry profits dipped 5% in the most recent quarter compared to a year ago, due in part to inflation-related macroeconomic headwinds like rising interest costs and a dip in bond markets. But take away banking’s Big Four, all of which have assets under management of more than $1 trillion, and that 5% drop becomes nearly 20%. The slowdown corresponds with the four banks’ increasing grip on the industry, hoovering up 45% of all industry profits, up from just 35% a year ago and more than the average 39% over the past decade.

And there’s a reason why: Thanks to the high-profile implosion of Silicon Valley Bank and subsequent failures of Signature Bank and First Republic Bank, depositors grew far more aware — and wary — of the risks of banking outside the perceived safety of the Big Four. Meanwhile, rising interest rates have created a rat race among small banks to offer higher payouts to keep depositors from fleeing. Unsurprisingly, banking’s top dogs have seized on that opportunity:

• While smaller banks paid an average of 3% per year on interest-paying accounts in the third quarter, the big four banks paid an average of just 2%. In addition, at regional banks, some 40% of accounts are interest-paying, compared to just 30% among the big-league sluggers.
• “The biggest banks have not had that much deposit pressure,” Alexander Yokum, Equity Research Analyst at CFRA, told the FT. “You see the net interest margins of the smaller banks have been hit much harder than the big banks.”

Reality Check: And that’s hardly the worst for the little leaguers. According to a Goldman Sachs note published earlier this year, US banks hold over half of the $5.6 trillion in outstanding commercial loans — and small and regional banks hold more than half of it. Worse, Morgan Stanley analysts predict that valuations of office and retail properties could drop by as much as 40%, which risks triggering a high rate of defaults. That’s why small banks are reserving more as a percentage of their loans for potential losses. Let’s just hope the industry learned its lessons since SVB went belly up.