Banks See Billions Exit Interest-Free Accounts -- WSJ
October 23 2018 - 3:02AM
Dow Jones News
By Rachel Louise Ensign
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 23, 2018).
There's less free money to go around for banks.
After nearly three years of rate increases from the Federal
Reserve, customers are pulling billions of dollars out of accounts
that don't earn interest and putting their money into
higher-yielding alternatives. That will crimp banks' ability to
grow profits going forward.
The four largest U.S. banks -- JPMorgan Chase & Co., Bank of
America Corp., Wells Fargo & Co. and Citigroup Inc. -- reported
a combined 5% drop in U.S. deposits that earn no interest in the
third quarter compared with a year ago. Customers withdrew more
than $30 billion from U.S. bank accounts that don't earn interest
over the year that ended June 30, the first such annual decline in
more than a decade, according to Federal Deposit Insurance Corp.
data.
These deposits largely consist of business and consumer checking
accounts and are considered particularly valuable because banks can
use these no-cost deposits to make loans. As short-term interest
rates rise, they become even more lucrative.
Although the Fed started raising short-term rates in December
2015, banks have been able to boost earnings by charging higher
rates on loans while still paying depositors nearly nothing. But
after eight incremental Fed increases, some customers are moving
their money to capture higher yields elsewhere, threatening future
gains in bank profits.
Deposits that earn no interest are "the crown jewel of the bank
funding base," said Allen Tischler, a senior vice president at
Moody's Investors Service. "You start losing that and you end up
not being able to benefit from future rate increases."
Before the financial crisis, noninterest bearing deposits made
up a much smaller portion of money at banks. In 2007, the Fed
started cutting interest rates in an effort to combat mounting
economic problems. The central bank left them near zero for seven
years in an unprecedented move.
For many individual depositors, rates were so low for so long on
money-market and savings accounts across the industry that they
opted to keep their money in checking accounts that earned nothing
at all.
Noninterest deposits also became more attractive to corporate
customers because the government offered unlimited insurance for
many of these in the years after the crisis. Another incentive for
corporate customers: They often earn credits to cover fees on other
bank products when they put money in noninterest accounts. With
rates so low, those credits were often worth more than they would
have earned in an interest-bearing account.
When the Federal Reserve started raising rates in December 2015,
bank profits quickly benefited. That was because lenders started
charging more on certain loans like credit cards and lines of
credit to businesses, but didn't immediately pay depositors
more.
Slowly, lenders started paying higher rates to some savvy
corporate and wealth-management customers who might otherwise take
their money elsewhere. Still, money in noninterest accounts
continued to grow.
That is now reversing, even if slowly. Noninterest deposits of
around $3.2 trillion were equal to 26.3% of domestic deposits at
U.S. banks in the second quarter, according to FDIC data. Although
way above precrisis levels, the ratio is down from 27.5% a year
ago. That equates to about $30.6 billion less in noninterest
accounts.
The push for a better deposit deal is coming mostly from
businesses, which have more to gain because of their large amounts
of cash. Lenders including Bank of America, JPMorgan and regional
lender PNC Financial Services Group Inc. all said on earnings calls
that business customers moved money from accounts that earn zero
interest into accounts that pay more in the third quarter.
Bank of America, for instance, said average corporate
noninterest deposits fell 11% in the third quarter compared with a
year earlier. Meanwhile, corporate deposits that earned interest
rose 49% over that same period.
"Does it make sense to have the money in a noninterest account?
It used to," said Tom Hunt, director of treasury services at the
Association for Financial Professionals. When the trade group
surveyed its members who work in corporate finance, it found
companies in 2018 kept less of their short-term cash in bank
deposits and more in higher-paying investments.
The result: Not only do the banks have to pay up for more of
their deposits, they also have to pay more on the deposits that pay
interest. Both factors weigh on bank lending profit margins, which
are closely watched by investors.
"Non-interest-bearing deposits are the goose that lays the
golden egg for a bank," said Gerard Cassidy, an analyst at RBC
Capital Markets. Their decline, he added, is one reason the profit
boost from rising interest rates will likely end over the next year
or so.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
October 23, 2018 02:47 ET (06:47 GMT)
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