Competition Update: Banks Bidding Up Long-Term Deposits?

thePoint
November 29, 2004

Despite three increases in the federal funds rate since the end of the second quarter, banking companies have not felt pressure to raise deposit rates. Consumers continued to pour money into bank accounts rather than the stock markets from July through September. Strong deposit growth, combined with weak loan demand, suppressed banks' appetite to compete for even more deposits.

But now, with the prospect of another Fed rate hike this year, some banks are bidding up longer-term deposits, according to the American Banker newspaper. National City Corporation’s chief executive officer, David Daberko, said in an interview last month that consumers' continuing anxiety about the stock market means that billions of dollars in money market accounts could be waiting to go into certificates of deposit.

Hoping to capitalize, banks are "attempting to lock in some longer-term funding at relatively low rates today," Daberko says. "So they're bidding up in the CD market to get that money in the door, creating some pressure for others."

Data from Informa Research Services Inc. of Calabasas, California, show rates on CDs with durations of three months to three years rose in the third quarter. The national average for a six-month CD, for instance, rose 12 basis points (bp) to 1.32%, and two-year CDs rose 13 bp to 2.4%. The data are for the weeks from July 13 to Sept. 21. So far this year, the Fed funds rate has climbed 75 bp to 1.75%.

Banks have generally been slow to raise deposit rates. Mark Fitzgibbon, the director equity research at Sandler O'Neill & Partners LP, indicates most of the bankers he has talked to recently have said they are "loath to pass through much of the Fed rate increases to their deposit customers." Banks are likely to absorb another Fed rate hike rather than pass it along, but Fitzgibbon said they're expected to ratchet up deposit rates later this year.

Changes in deposit rates lagged increases in loan interest rates in the third quarter, allowing some banks to ease the pressure that had been building on their margins. Over all, bank net interest margins stabilized after shrinking in eight of the nine preceding quarters, wrote Ruchi Madan, an analyst at Citigroup Inc.'s Smith Barney, in a recent report. Madan calculates that of a third-quarter rise of 44 bp in the prime rate, banks passed along about 17.6 points on variable loans but only 2 bp in deposit rates. This quarter, she estimated, net interest margins will widen by 4 to 5 bp, after two years of declines.

Fitzgibbon indicates bankers report that consumers seem not to care that rates have not risen on money market or interest-bearing checking accounts. Anecdotes about the CD business indicate various degrees of competitive pressure.

Like many other banking companies, National City has been focusing on attracting new households with free checking. Daberko says the Cleveland company is "less inclined to grow deposits just for the sake of growing deposits." He indicated last month that rates on money market and savings accounts have not gone up very much because they had not gone all the way down when the interest rates were lower. He added, however, that he expected deposit rates to rise in the future as short-term interest does.

"What the consumer wants in the Midwest is higher rates, and we're in a position to give them that as rates rise," says Daberko. James E. Rohr, the chief executive officer of Pittsburgh's PNC Financial Services Group Inc., adds that it is focusing on the CD business for the first time in six months, jacking up rates. "We've put in some relationship pricing that has turned out to be positive for us when CDs picked up," he says.

Elizabeth Acton, the chief financial officer of Huntington Bancshares Inc. of Columbus, also reports that banks that had cooled to CDs have recently gotten more interested. Wachovia Corp. of Charlotte indicates an 11% increase in its third-quarter net interest income could be traced to its ability to hold the line on deposit pricing. Benjamin Jenkins, the head of its general bank, told analysts last month that he was feeling no pressure to raise deposit rates. Rather than try to price deposits higher than everyone else in its markets, Wachovia has positioned itself as second, third, or fourth.

Some banks have been aggressive in offering promotional rates to attract and retain customers. Cincinnati's Fifth Third Bancorp announced a major deposit-gathering campaign for the third quarter and said it beat its goal of gathering $2 billion in deposits by 20%. The company also marked the opening of its 1,000th branch in the quarter with a 1,000-day CD at a 4% rate. That is equal to the highest rate offered by any top 50 banking company on a three-year CD, according to Informa's data. (One thousand days is three months shy of three years.) Chief financial officer Mark Graf said recently that Fifth Third had been conservative with deposit offers but has now returned to its historical practice of using "promotional rates as marketing dollars to bring folks into the door."

This article was first published by The Point for Credit Union Research and Advice at http://thepoint.cuna.org/ and is reprinted with permission.