By Rachel Louise Ensign
Despite seven interest-rate increases by the Federal Reserve
since 2015, many banks have resisted rewarding deposit customers
with higher rates.
Some customers, however, are getting a far better deal.
The recent moves from the Fed have set off a battle for deposits
for the first time since the financial crisis. In an effort to
stanch deposit declines, lenders are offering new customers
one-time payments of hundreds of dollars to open accounts. For the
banks, these bonuses can have the benefit of being tucked away in
obscure parts of earnings reports where they don't weigh on closely
followed profitability metrics.
While some lenders have been giving deposit bonuses for years,
the pitches have grown larger and more common. Over the six months
ended in March, the number of banks sending more than five million
of the mail offers has risen to 15 from seven in mid-2015,
according to consulting firm Novantas. The average bonus at
regional lenders, which likely spend millions of dollars a year on
the cash incentives, also has risen to almost $300 from less than
$200 over a similar period, the firm said.
Most large national and regional banks including JPMorgan Chase
& Co, Wells Fargo & Co. and SunTrust Banks Inc. are now
offering bonuses to certain customers that typically range from
$150 to $500. While that might not be as lucrative as a higher rate
for people with large deposit balances, it is a big payout for
those with smaller accounts.
The offers stem from the growing desire to attract new primary
checking and savings accounts. These customers are considered the
most desirable because they rarely leave and are promising
prospects for other product sales.
The bonuses are "the modern version of a toaster," said Matt
Jauchius, chief marketing officer at Cincinnati-based Fifth Third
Bancorp, referring to the gift banks gave to those opening new
accounts years ago. He says the bank is handing out more $250
offers for those opening new checking accounts.
The push comes as deposits have grown harder to come by. The
Federal Reserve has raised its benchmark interest rate by about
1.75 percentage points, which has caused some depositors to shop
around for a money-market fund that earns higher yields. The
central bank is also unwinding its balance sheet, a process that
broadly sucks deposits out of the financial system.
While the very biggest banks have continued to add new money, 10
of 22 major regional banks in 2017 experienced declining U.S.
deposits, compared with only two the year before, according to a
Wall Street Journal analysis.
Deposits are the lifeblood of banks and a key factor in
profitability. Banks use deposits to make loans, so a bank that
loses them could be forced to rein in lending or pursue more
expensive funding.
Since the financial crisis, when savers flocked to federally
insured bank deposits, lenders have accumulated billions in
additional deposits. And they still have far more than they need to
fund loans.
But growth in deposits has slowed, which threatens an important
source of low-cost funding for banks in recent years. When the Fed
raised interest rates in the past, banks raised rates paid to
depositors to keep them around. This time around, banks have passed
along only 18% of the benefit from higher rates to customers,
according to Erika Najarian, a bank analyst at Bank of America
Corp.
Banks increasingly prefer the bonuses to raising rates broadly
because they allow them to specifically target people who open a
new primary bank account. A recurring direct deposit or minimum
balance is typically required to earn the bonus, making it hard to
earn the bonus on a secondary account.
The bonuses also typically have the benefit of not weighing on
key deposit metrics, such as net interest margin, that bank
investors are following closely now that rates are rising. Instead,
the bonuses are often accounted for in other parts of bank earnings
that investors pay less attention to.
Investors have cheered how the low rates paid on deposits have
helped lift net interest margin, which measures profit margins from
interest. But such enthusiasm doesn't factor in the effect of the
bonuses.
"The cost of deposits on a bank's balance sheet doesn't tell the
full story anymore," said Jason Goldberg, an analyst covering banks
at Barclays PLC.
A number of banks including Regions Financial Corp. and KeyCorp
count the offers as a marketing cost. Others take a different
approach, like SunTrust, which subtracts the cost from
deposit-account service charges. Of the several banks the Journal
contacted, U.S. Bancorp was the only bank that said it counted the
costs as an interest expense, which means they would show up in its
net interest margin.
Banks generally don't disclose the total amount they spend on
the bonuses.
In the first quarter, Fifth Third reported expanding net
interest margin, helped by keeping rates paid on deposits low. The
figure didn't reflect the bonuses, which are categorized as a
marketing cost. Marketing expenses jumped to $32 million in the
first quarter from $19 million a year earlier, partly due to the
bonuses, though the bank's chief marketing officer, Mr. Jauchius,
says those are "not the largest line item in my budget."
Mr. Jauchius says the bonuses reflect the fact that "there's a
finite amount of deposit customers and dollars that will change
banks. The battle is to get a disproportionate share of that."
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
June 22, 2018 05:44 ET (09:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.