US banks are being forced to do something they haven’t done for 15 years: fight for deposits.
The jump in rates on CDs and other bank deposits has been a boon for consumers and businesses, but it’s a costly development for the US banking industry, which is bracing for a slowdown in lending and more writedowns, says Barclays Plc analyst Jason Goldberg. And for smaller regional and community banks, losing deposits can be serious and weigh heavily on profitability.
Nevertheless, banks are feeling more pressure to boost rates, which will raise funding costs and crimp profit margins. According to Barclays, the median large-cap bank can expect growth in net interest income, a measure of lending profits, to slow to 11% this year, from 22% last year. Rising CD rates have led to huge growth in sales of the product: CDs outstanding totaled $1.7 trillion in the US banking industry in the fourth quarter, up from $1.49 trillion in the third. That’s the biggest quarterly jump in at least two decades, according to S&P.
When the Fed boosts rates, banks usually get higher lending income quickly, as the rates on the loans they’ve made reset to higher levels. They can be slower to boost payments to depositors. The rising income and lagging growth in expenses mean that banks can see their net interest income soar, as happened last year.
The largest US banks, and major regional lenders, can often borrow more in bond markets globally when they lose deposits. But smaller regional banks and community lenders have fewer options, and often have to win more deposits or get more funding from the Federal Home Loan Banking System.
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