By Christina Rexrode
Is the sixth time the charm? The Federal Reserve has raised
short-term rates five times since late 2015, but banks largely
stood pat on deposit rates for rank-and-file customers. Now, with
the Fed expected to lift rates again this week, there are signs
this could change.
The average rate on a one-year certificate of deposit, or CD,
rose to 0.49% last week, according to Bankrate.com, a
personal-finance website. While that's peanuts by historical
standards, it is the highest in more than seven years, and the
march upward has quickened after the most recent Fed moves.
Banks over the past year have already raised the interest paid
on deposits held by businesses and affluent individuals who demand
it. But their tentative foray into higher CD rates is more about
trying to get ahead of average customers' demands.
It's a tricky calculation. Banks don't want to pay more than
they have to, but they also don't want to keep deposit rates so low
that customers eventually leave.
"This is the biggest story that investors and bankers are going
to talk about for the next two years," said Gerard Cassidy, an
analyst at RBC Capital Markets, "after a period of eight or nine
years of not even worrying about it."
Getting the payment rate right is crucial. Banks use deposits to
fund loans, and they make money by paying out less on deposits than
what they charge on loans. Paying higher deposit rates increases
costs, potentially crimping profits.
But if enough depositors take their business elsewhere, that can
hamper a bank's ability to make more loans. That, in turn, could
hurt revenue.
So far, banks have succeeded with a cautious approach. Although
loans are growing at a slower pace than this time last year, the
industry's lending-related income has been rising throughout the
Fed's rate-raising cycle.
Overall net-interest income for U.S. banks rose 8.5% in the
fourth quarter from a year earlier, according to Federal Deposit
Insurance Corp. data, a quicker clip than the 7.6% increase in the
year-ago quarter. Meanwhile, growth in banks' deposit expenses has
been unusually slow.
The biggest banks are still flush with deposits, which exceed
their loans. That makes them less inclined to rush to increase
rates.
But Mr. Cassidy and other analysts think banks could soon be
competing for deposits. Among other reasons, some small and
regional banks already are trying to gather more deposits and could
raise rates. For banks, CDs are an appealing way to test raising
rates for consumers. Since they have fixed terms, usually from one
month to a decade, CDs let banks lock in rates so their entire
deposit base doesn't reprice with each Fed increase. They also make
it easier for banks to create longer-term loans.
They aren't the easiest sell to consumers, though, since many
don't want to lock up their money while rates are expected to keep
rising. Others can't be bothered. "I think there is still a
relative indifference," KeyCorp CEO Beth Mooney said in an
interview.
M&T Bank Corp. is experimenting with higher rates on some
one-year CDs after a previous pitch on five-year CDs didn't gain
much traction. But Chief Financial Officer Darren King said in his
experience, customers only start to notice when the fed-funds rate
rises to about 3%. (The fed-funds target, now at 1.25% to 1.5%, is
widely expected to be raised by a quarter percentage point on
Wednesday.)
This rate-raising cycle is different from the last one, from
2004 to 2006. Accustomed to a decade of ultralow rates, customers
so far seem apathetic about chasing rates, even though
technological advances have made it easier to move money.
Gary Zimmerman, founder of MaxMyInterest, which matches bank
customers with higher-yield bank accounts, said his clients tend to
be uninterested in CDs. "If they want to lock up their money,
they'll do it in a way where they can get a higher return," such as
real estate, Mr. Zimmerman said.
Higher consumer prices could eventually sway some customers to
search for better deposit rates, said Greg McBride, chief financial
analyst at Bankrate.com. When the Fed raised short-term rates in
December 2015, the annual inflation rate as measured by the
consumer-price index was 0.7%. In February annual inflation stood
at 2.2%.
"They're not seeing that in their savings account," Mr. McBride
said, "but they are when they're shopping at the grocery
store."
Still, banks aren't moving en masse to raise rates. The average
rate on a money-market deposit account, which is a widespread type
of savings account, started at 0.10% before the rate-raising cycle
and is now at just 0.15%, Bankrate.com says.
The banks that have raised deposit rates are mostly online and
smaller lenders. And banks are still moving slowly. In the last
tightening cycle, the average yield on a one-year CD rose 1.15
percentage points during the Fed's first five rate moves, as
measured from its low point before the increases. In this cycle, CD
rates have risen just 0.27 point, according to Bankrate.com.
Ryan Easton, an IT consultant in Louisville, Ky., was tired of
waiting for higher rates and recently switched from a local lender
to Ally Financial Inc., an online bank offering more attractive
rates. Mr. Easton, 30 years old, was hesitant at first and hasn't
been able to persuade his parents to follow suit.
But now Mr. Easton jokes that the only thing he misses about
going to a bank branch is the lollipops. "With the interest-rate
difference," he said, "I could probably order my own."
Write to Christina Rexrode at christina.rexrode@wsj.com
(END) Dow Jones Newswires
March 19, 2018 05:44 ET (09:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.