M&T Bank (NYSE:MTB), State Street (NYSE:STT), and Charles Schwab (NYSE:SCHW) saw their deposits decline as customers shifted their money to products offering higher returns. This indicates that banks could face fierce competition in the future to attract depositors, which could impact their NIIs (Net Interest Income).
Charles Schwab registered an 11% decline in deposits in Q1. Meanwhile, deposits dropped by about 3% for both M&T Bank and State Street.
The banking sector saw a significant rise in deposits during the pandemic, reflecting the Fed’s effort to pump more money into the financial system. However, the reverse started to happen as the Fed aggressively moved ahead with rate hikes to tame inflation. Banks witnessed swift deposit outflows, which was also the key reason behind the failure of three U.S. banks, including SVB Financial Group.
Adding to their woes, tech giant Apple (NASDAQ:AAPL) now offers a savings account with a high yield of 4.15%. This will put banks in a tight spot as they offer an insignificant APY (annual percentage yield) on the savings account.
According to the FDIC (Federal Deposit Insurance Corporation), the national average rate for savings accounts stood at 0.37% as of March 2023.
With Apple and other alternative products offering higher yields, the outflow of deposits could continue, driving competition and deposit costs higher and pressurizing net interest income.
Against this backdrop, let’s check what analysts recommend for MTB, STT, and SCHW stocks.
Is MTB a Good Stock to Buy?
MTB stock gained following the Q1 earnings, reflecting strong pre-provision net revenues and solid credit quality. Further, according to Goldman Sachs analyst Ryan Nash, MTB’s deposits came in better than feared.
However, MTB expects intense competition for deposits amid industry-wide outflows. Moreover, it projects 2023 average total deposit balances to decline by low single digits compared to the average of $158.5 billion in 2022.
With seven Buy and eight Hold recommendations, MTB stock has a Moderate Buy consensus rating on TipRanks. Analysts’ average price target of $156.38 implies 24.45% upside potential from current levels.
What’s the Prediction for State Street Stock?
State Street stock fell over 9% on Monday due to the Q1 earnings miss. Further, its NII fell sequentially, reflecting lower deposits. The bank expects its NII to decline further in Q2. It forecasts a 5-10% sequential decrease in its Q2 NII as deposits are likely to fall again due to credit tightening and the impact of rising interest rates.
Following the Q1 results, Bank of America Securities analyst Ebrahim Poonawala lowered his price target on STT stock. Poonawala recommends a Hold on STT stock and expects a prolonged higher interest rate environment to hurt its NIIs.
Overall, STT stock has a Moderate Buy consensus rating, reflecting six Buy and eight Hold recommendations. These analysts’ average price target of $88.58 implies 21.88% upside potential.
Is Charles Schwab a Buy, Sell, or Hold?
Charles Schwab’s Q1 earnings surpassed Street’s estimate. However, higher funding costs and a pause on the share repurchase program suggest challenges ahead. SCHW increased its utilization of higher-cost funding sources, which will likely weigh on its revenues in Q2. It projects a mid-to-upper single-digit rate decline in its total revenues.
Following the Q1 results announcement, Bank of America Securities analyst Craig Siegenthaler lowered his price target on SCHW stock to $51 from $53. The analyst keeps a Sell rating on SCHW stock due to the ongoing challenges and pauses on the share buyback plan.
Charles Schwab stock has a Moderate Buy consensus rating on TipRanks, based on 11 Buy, four Hold, and one Sell recommendations. Analysts’ average price target of $67.13 implies 27.21% upside potential.
Bottom Line
The higher interest rate environment indicates that deposit outflows could continue. Thus, higher deposit costs and competition to raise deposits will likely weigh on the NIIs of these banks, at least in the short term.
Wall Street analysts are cautiously optimistic about MTB, STT, and SCHW stocks and see decent upside potential.
