The upward pressure on banks’ commercial deposit costs, which began earlier this year, is intensifying as the Federal Reserve continues its interest rate hikes.
The average interest rate paid on demand deposits from business customers jumped to 75 basis points in August, up from just 10 basis points in March and approaching pre-pandemic levels, according to a survey of 21 regional, superregional and national banks by the consulting firm Curinos. Rates on business customers’ money market deposit and savings accounts saw a bigger jump, hitting 88 basis points in August, according to the survey.
Curinos also found that rebates for non-interest-bearing deposits — where business customers get credit to offset the costs of other services they buy from the bank — are also starting to increase slightly.
Among banks’ business customers, “the rate situation is really starting to heat up,” said Peter Serene, a consultant at Curinos.
Serene and other analysts say the pressures in the coming months will vary depending on each bank’s deposit mix. Banks with large retail footprints and consumer wallets will fare better, analysts say, as will those whose business deposits are more heavily weighted toward the funds businesses use for payroll and other day-to-day needs.
But even if pressures remain relatively subdued, particularly at some banks, observers predict commercial deposit costs will accelerate further as the Fed continues to hike rates.
The topic is likely to feature prominently in some banks’ third-quarter earnings calls, with analysts and investors trying to discern which institutions will be forced to pay more for their deposits.
The rate hikes come as overall bank deposit growth slowed. started to stabilize or even decline These last months. Earlier in the pandemic, deposits flooded into banks as business customers built up their cash reserves, in part because they couldn’t get high returns on money market products and other safe investments.
But within six months, the Fed raised short-term interest rates to levels not seen in 2008. That boosted yields on alternatives to deposits and caused rate-seeking clients to turn to money market funds or similar instruments.
Business customers are more sensitive to rate changes than consumers, especially when it comes to extra cash that they don’t use for operational purposes. Commercial deposits fell by an average of 6.1% in August compared to the previous year in the banks surveyed by Curinos. Banks with growth in the bottom quartile saw a decline of 15.4%.
bank executives showed little concern on the picture of filings at an investor conference last month, saying their filing costs are proceeding largely as expected.
Analysts expect banks to report strong net interest margins — a measure of the interest they earn on loans relative to the interest they pay on deposits — in their upcoming earnings releases. Earnings season kicks off on Friday, with JPMorgan Chase, Citigroup, Wells Fargo, Morgan Stanley, US Bancorp and PNC Financial Services Group all releasing their quarterly results.
When the Fed raises rates, banks earn more interest on their loans, but their funding costs may also increase. At this point, the benefit of each Fed rate hike fades, according to a research note from analysts Raymond James. In recent meetings, bank executives suggested a greater focus on deposit outflows and agreement that NIMs “will likely peak over the next few quarters,” wrote analysts at Raymond James.
Banks have “successfully defended deposit costs so far,” but are beginning to see customers migrate to higher-yielding products, or they are giving one-time increases to customers asking for higher rates, wrote the analysts.
Some banks are “more proactive” than others, who are more comfortable seeing some deposits leave, given the excess liquidity they have been sitting on over the past two years, according to Tim Partridge, head of commercial banking at the consulting firm Deloitte.
The latter group is in a “wait-and-see mode,” letting go of some excess deposits and less profitable relationships as they “retain the ones they really want,” Partridge said.
Dallas-based Comerica sees some rivals offering higher promotional rates “that could attract speculative money,” chief financial officer James Herzog said at an industry conference last month, referring to the funds. that business customers can use to seek higher rates.
“We’re not necessarily interested in speculative money. That said, we’re very attentive to what’s happening in the rate environment,” Herzog said, according to a transcript from S&P Global Market Intelligence. “And as a commercial bank, it’s really one-on-one discussions with customers, and we think we’re very careful about that.”
Fifth Third Bancorp CEO Timothy Spence told the same conference that the Cincinnati bank “remains disciplined from a pricing perspective” even though it expected so-called peak deposits to continue. to leave the bank.
While deposit outflows have been large and continue, a significant portion of these funds go to Fifth Third’s money market portal and generate fee income, and Fifth Third has let out more expensive deposits.
The extent to which the deposit market becomes significantly more competitive remains a “looming concern for investors,” but near-term worries about rising deposit prices may be overstated, wrote RBC Capital Markets analyst Jon Arfstrom. , in a research note focused on mid-sized banks.
That’s partly because even though deposits have fallen from their peak, liquidity in the banking system remains elevated, Arfstrom wrote.
“Commercial banks are not yet facing the same funding pressures today that they would have faced in previous tightening cycles,” he wrote.