US banks executives expect pressure on deposit costs to diminish with the end of Federal Reserve rate hikes but are split on when that will happen.
While many bank executives expressed hope for rate cuts during earnings calls for the fourth quarter of 2023, they emphasized that there are multiple factors influencing the cost of deposits. Some market participants believe competition among depository institutions will be one of the factors keeping deposit prices from falling quickly.
Executives at U.S. Bancorp and Renasant Corp. were among those who said in fourth-quarter earnings calls that they expect competitive pressures to persist in the near term.
Deposit cost is a "big wild card" in raising net interest income, Ronald Nicolas Jr., CFO of Irvine, Calif.-based Pacific Premier Bancorp Inc., said in a Jan. 29 earnings call.
"The industry continues to see challenges across that aspect of it," Nicolas said. "I wouldn't go so far as to say that we've conquered that or slayed that dragon at this point in time; I think we'll still see some pressures in that area. But we're cautiously optimistic on that front."
Hopes for lower rates
Billings, Mont.-based First Interstate BancSystem Inc. expects deposit costs to moderate in the first half of 2024, as a majority of its time deposits have already repriced near market rates and customers' shift into higher-cost deposits has slowed, CFO Marcy Mutch said during a Jan. 31 earnings call.
Phoenix-based Western Alliance Bancorp. has started having individual conversations with clients about less generous terms on deposits, CFO Dale Gibbons disclosed during a Jan. 26 earnings call.
"The fever is broken on the rate cycle, certainly, and the opportunity to move into either other financial institutions or to move it to some kind of off-balance sheet thing that maybe is invested in Treasury, all of those have fallen in terms of what the opportunity is and what they might be able to migrate to," Gibbons said.
Cleveland-based KeyCorp is also preparing to cut rates in its consumer deposit portfolio when the Fed cuts interest rates, CFO Clark Harold Khayat said during an earnings call held Jan. 18.
Delayed gratification
However, some bank executives expect deposit costs to rise in the near term.
Pittsburgh-based PNC Financial Services Group Inc. projected a cumulative deposit beta of 45% through the first quarter, up from 44% through the end of 2023. The expected rise in the cumulative deposit beta, which represents the percentage change in the fed funds rate that banks have had to pass on to depositors during the rate hike cycle, implies that deposit costs will rise slightly in the quarter.
Still, PNC expects deposit rates for commercial and high net worth clients to drop "fast" as soon as the first Fed interest rate cut appears, CFO Robert Reilly said during a Jan. 16 earnings call.
Evansville, Ind.-based Old National Bancorp still expects rising deposit costs through the first half of this year.
"We are still experiencing upward pressure on deposit rates, but we have seen a marked deceleration in deposit costs in the quarter and into January," CFO Brendon Falconer said during a conference call. The bank's cumulative beta was 35% in the fourth quarter of 2023, and it expects a peak of 39% in the second quarter, followed by a down beta in the "low 20%" range by the fourth quarter in a declining interest rate environment.
Huntington Bancshares Inc. also expects deposit costs to continue to rise at a decelerating rate until rate cuts begin, CFO Zachary Wasserman said on an earnings call. The Columbus, Ohio-based institution expects a cumulative down beta over a three-quarter period of about 20% if the Fed's first cut arrives in March, with five cuts total this year, and "less than that if there was an extended pause through the late summertime period," Wasserman said.
Fulton Financial Corp. expects deposit pricing pressure to continue in the first half of 2024 and deposit costs to go up more than loan yields. The Lancaster, Pa.-based institution will also continue to see migration from non-interest-bearing deposits into interest-bearing products throughout 2024 but at a slower pace than in 2023, CFO Mark McCollom said during a Jan. 17 earnings call.
Pasadena, Calif.-based East West Bancorp Inc.. expects "a reasonable downtick" in deposit pricing as rates fall, CFO Christopher Del Moral-Niles said during a Jan. 23 earnings call, adding that those benefits will likely arrive in the latter half of the year.
