Bank margins under pressure as deposit mix shift is far from over

Deposit costs at US banks increased notably in the second quarter as banks sought to protect their core funding. Those efforts were largely successful, with deposit outflows slowing from earlier this year, but the defensive posture came with a cost in the form of lower net interest margins.

Banks have also built their reserves for loan losses as they prepare for credit quality to slip from pristine levels.

We expect the defensive moves to continue in the second half of 2023, resulting in a hit to earnings.