US banks post demand deposit growth in Q4 2023 as cost pressures ease

Banks scored sequential deposit growth in the fourth quarter of 2023 for the first time in almost two years, and funding cost increases continued to decelerate with the Federal Reserve's last rate hike moving further into the rearview mirror.

Deposits across the industry grew 1.1% to $17.345 trillion, including a 1.7% increase in demand deposits to $6.121 trillion, according to data from S&P Global Market Intelligence. The fourth quarter tends to be seasonally strong for deposit growth, but the last time the industry posted sequential deposit growth was the first quarter of 2022, and year-over-year declines have continued to moderate.

Meanwhile, sequential growth in banks' total cost of funds grew at a smaller pace for the fourth consecutive quarter, with an increase of 21 basis points to 2.48%.

The Fed's last rate hike was in July 2023. Banks have started to describe outlooks for declines in deposit cost once the Fed starts cutting rates. A shift in market expectations toward fewer rate cuts this year has pushed out prospects for deposit cost relief, however, and lagged upward pressure on deposit costs is likely to persist.

Fever has broken

Some banks have started to test the waters for an environment of falling deposit rates.

Western Alliance Bancorp. is having conversations with clients about less generous terms, but the company is moving carefully to avoid attrition. "The fever is broken on the rate cycle," CFO Dale Gibbons said during a Jan. 26 earnings call.

Other banks including Regions Financial Corp. have said they are shortening maturities for their certificates of deposits (CDs). Banks such as PNC Financial Services Group Inc. have highlighted the speed at which they expect rates to fall for segments including businesses and high net worth clients once the Fed cuts rates.

"We have 50% of our deposits that are institutional, wholesale, commercial, whatever you want us call it," U.S. Bancorp CFO John Stern said at a conference on Feb. 22. "And that is going to reprice as fast down as it went up."

A survey of banks' pricing activity by analysts at Jefferies found a number of downticks in rates offered for high-yield (HY) savings accounts and CDs between Jan. 11 and Feb. 21.

Still, the increase in deposit costs in the fourth quarter, even with the Fed on hold, shows that money continues to shift into accounts paying higher rates.

On the retail side of the business, "where you've got a lot of interest checking, [demand deposit] people who haven't moved, they will keep moving," Truist Financial Corp. CFO Michael Maguire said Feb. 21. "I think that also translates into even when you do see a cut."

Curinos, an information and consulting firm, said that its data shows almost half of consumer savings balances remain in accounts yielding less than 25 basis points.

"Rates for the highest offerings (HY savings accounts and one-year CDs) are plateauing or decreasing," Jefferies analysts wrote in a note Feb. 21.

However, "deposit cost relief may be farther away if rates stay elevated," the analysts added. "Fewer cuts could delay more meaningful deposit cost decreases in 2024."

Quality flows

In addition to deposit growth overall, the quality of deposit flows was stronger than in recent periods.

While demand deposits increased, growth in time deposits decelerated to 6.9% sequentially, down from 10.1% in the third quarter of 2023, and a high of 24.8% in the first quarter of 2023.

The decline in savings balances, the largest category of deposits, decelerated to 1.2%, compared with a decline of 1.7% in the third quarter of 2023 and a recent peak decline of 7.9% in the first quarter of 2023.

Modest deposit growth has continued so far in 2024 on a seasonally adjusted basis, according to weekly data from the Fed. From Dec. 27 through Feb. 14, seasonally adjusted deposits across domestically chartered banks were up 0.2%, though they were down 1.2% without seasonal adjustment.

Banks generally do not expect deposit growth to snap back.

"Deposit flows have largely stabilized, with most banks anticipating flattish total growth in 2024," Jefferies analysts wrote in another note on Feb. 22.