The price of staying

Corporate money rarely sits still. It arrives from customers, leaves for suppliers and moves between currencies and accounts. A bank that handles those flows can attract deposits alongside payments and securities business. Citigroup’s latest results show the value of that combination—and why counting the money in its accounts explains only part of the return.

The bank’s third-quarter results, released on October 13th, reported average deposits up 11% from a year earlier and average loans up 12%. Reuters’ coverage also described intensifying industry competition to retain customer money. Citi was attracting balances in a market where customers had reasons to demand more for them. Its Services division explains how those balances fitted into a broader commercial relationship.

Goldman Sachs supplied a different example, reporting a 72% rise in equities revenues from the same quarter a year earlier. Financing investors’ positions and intermediating their trades generates earnings through a different route from corporate cash management. Reading the two results together reveals several sources of banking strength, with different costs and dependencies.

Balances with a job

At Citi, Services drove the increase in average deposits. Its Treasury and Trade Solutions business processes cross-border payments, clears dollars and provides commercial cards. Securities Services holds and administers clients’ assets. These activities bring cash into accounts as part of transactions customers need to complete, linking deposits to the bank’s payments and securities operations.

A corporate treasurer choosing a provider has to consider settlement arrangements, systems and service as well as interest. This gives a bank more ways to compete than offering the highest rate. It also gives the customer more to negotiate over. A low deposit rate may accompany valuable services; a higher one may be justified by the wider business. The economics sit across the relationship.

Citi reported gains on both sides of that relationship. Services net interest income benefited from higher average deposit balances and higher deposit spreads, while fees increased too. More activity also brought higher transactional and other volume-related expenses. The division’s growth therefore involved earning more from balances and services while paying to process the additional business.

Competition can alter this calculation. Researchers at the Federal Reserve Bank of New York have explained how deposit pricing depends on banks’ funding needs and customers’ alternatives. The share of a policy-rate change passed through to deposit rates is called the deposit beta. Its usefulness lies in tracking how funding costs respond as rates move; an old estimate cannot establish what a bank must pay today.

Account composition can matter even when no money leaves. A move from a low-interest account to a higher-paying product within the same bank raises funding costs without reducing total deposits. Citi’s reported improvement in Services spreads shows why that possible pressure must be distinguished from the division’s actual performance this quarter.

Different engines

Goldman attributed its equities gains to prime and portfolio financing, and to intermediation, particularly derivatives. In these businesses the bank supplies financing or helps clients obtain market exposure. The return depends on the activity and positions being serviced. It cannot be read as evidence that deposit-funded lending became equally attractive across the banking industry.

Its investment-banking results offered another distinction. Fees were higher than a year earlier, supported by underwriting and advisory work, while the backlog was smaller than in the preceding quarter. Fees record business already recognised as revenue; the backlog concerns prospective work. A strong annual comparison can coexist with a thinner pipeline, and a pipeline still has to turn into completed transactions.

Growth has a bill

Lending introduces a longer delay between earning revenue and knowing its full cost. Citi reported broadly unchanged net credit losses from a year earlier, while its provision for credit losses increased. The bank attributed its reserve build to changes in the macroeconomic outlook and portfolio growth. More credit was being extended, and the accounts also allowed for more future losses.

A provision is an expense in the income statement; an allowance is the accumulated estimate of losses against credit exposures. Neither is interchangeable with the period’s net credit losses. When the book grows, the allowance may need to grow even if each new borrower has similar credit quality to the existing ones. That cost belongs in an assessment of expansion alongside the interest new loans generate.

Citi’s Services results show an operating relationship producing deposits, spreads and fees together. Goldman’s equities results show the earning power of financing and intermediation. Neither is well described by a single story about rates. For the next quarter, the useful comparisons are the cost of deposits, the activity they support and the credit expense attached to growth. Money arriving matters; so does the business that persuaded it to stay.