USB US Bancorp

   (FROM THE WALL STREET JOURNAL 12/17/15) 
   By Rachel Louise Ensign 

Big U.S. lenders said they would raise rates on some loans after the Federal Reserve lifted its benchmark interest rate by a quarter percentage point.

Depositors hoping for a bump in their savings rates will need to wait, though.

J.P. Morgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Citigroup Inc. and other large banks said they would increase the prime rate, a key reference rate for a variety of loans including credit-card debt.

The moves reflected the Fed's decision to increase the federal-funds target rate from near zero, where it has been for the past seven years.

The Fed's decision marks the end of an era that had pinched banks' lending profits and forced them to change the way they do business. Lenders have anticipated that higher rates will provide an immediate boost to lending income, while also possibly helping loan demand.

But savers won't see benefits as quickly. As expected, banks didn't announce any corresponding increases in deposit rates to go with the rise in the prime rate.

The prime lending rate, which usually hovers above the fed-funds rate, will go to 3.5% from 3.25%. Other banks that announced a move included U.S. Bancorp, PNC Financial Services Group Inc., HSBC Holdings PLC and M&T Bank Corp. Most of the banks said the move would occur Thursday. Bank of America said it would increase its rate immediately.

In a rising rate environment, deposit-rate increases typically lag behind increases in loan rates by months, which is why banks can make more money when rates go up. By contrast, the yields on money-market mutual funds rise more quickly, and some funds are expected to raise the rate on those savings products within days.

Banks have had a hard time predicting the rate at which customer defections force them to pay out a higher rate on deposits.

In periods of rate increases by the Fed over the past two decades, the average interest paid on deposits rose by about 0.25 percentage point over the first year, according to data by Bankrate.com.Over the same period, the prime rate rose much more.

This is now "a bigger question mark than ever," given new regulations that make certain deposits more valuable than others, said Erika Najarian, head of U.S. banks equity research at Bank of America's BofA Merrill Lynch Global Research.

In 2006, banks passed along 17% of the increase in rates to depositors over the next year, said Ms. Najarian. This time around, the figure could rise to 30% or so, she said,

While the move in interest rates won't help bank profits significantly unless it is followed by further rate increases, the decision is expected to give a jolt to some of the most interest-rate-sensitive banks. At Bank of America, Evercore ISI projects the incremental Fed move would lead to $621 million more in net interest income over a year.

Fed Chairwoman Janet Yellen said Wednesday that she expected the central bank would raise short-term interest rates gradually in coming months.

Bank executives applauded the Fed move. "It just felt good," said U.S. Bancorp Chief Executive Officer Richard Davis.

When the Fed lowered interest rates near zero in the wake of the financial crisis, it ushered in a difficult period for bank profits, even as the broader economy slowly recovered.

Banks' lending profitability steadily declined through the recovery.

At larger U.S. banks, the net interest margin -- the difference between what banks charge borrowers and pay out to depositors -- has fallen from 3.89% in early 2010 to 2.92% in the third quarter of 2015, according to the Federal Deposit Insurance Corp.

Lenders tried to cope by cutting expenses and bolstering fee-based businesses that don't depend on interest rates.

Many banks had expected the rate increases to start earlier this year and took additional measures to maintain their bottom lines when that didn't happen. Some invested depositors' cash into higher-yielding, longer-term securities to counter the earnings pressure, a tactic that could backfire if those holdings lose value as rates rise.

Other bankers are more sanguine. BB&T Corp. CEO Kelly King said last week that he expected a small Fed rate increase to be "very stimulative" and help loan demand.

"It will enhance the income for savers, and savers will spend some of that money," Mr. King said at a conference last week.

---

Peter Rudegeair contributed to this article.

(END) Dow Jones Newswires

December 17, 2015 02:47 ET (07:47 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.