Transaction deposit costs turn corner across US banks in Q1 2024

The cost of interest-bearing transaction deposits fell sequentially for the first time since the Federal Reserve started raising interest rates in early 2022, a signal that funding cost pressure is abating.

Interest-bearing transaction deposit costs dipped 6 basis points across US banks to 3.14%, according to data from S&P Global Market Intelligence. Meanwhile, the cost of savings accounts increased 11 basis points to 1.90% and the overall cost of funds increased 8 basis points to 2.56%, extending a trend of declining sequential increases to five quarters.

Higher-for-longer interest rates are likely to inhibit widespread relief on funding costs as money is still moving out of low-cost accounts. However, that trend slowed in the first quarter "and were largely concentrated to January," analysts at Raymond James said in a May 13 note. "We are seeing some relief for the highest cost funding sources."

As such, first-quarter earnings reports left net interest income (NII) outlooks largely intact.

"This bodes well for the timing of an industrywide NII inflection," Piper Sandler analyst Stephen Scouten said in a May 13 note on banks in the South, "which we think will be seen in earnest in [the second quarter] as higher [earning asset] yields overwhelm the marginal deposit pressures as rates remain stable."

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Plateauing

While pushed-out rate cut expectations have delayed "substantive down-beta actions," Huntington Bancshares Inc. still expects robust deposit growth. The shift in the rate environment translated into only "marginal tuning" to its previous guidance, the company said. Beta is often used to refer to the correspondence between deposit costs and underlying rates.

"With deposit pricing competition lessening, banks are testing the waters by marginally decreasing rates" on higher-cost offerings, analysts at Jefferies said in a May 9 report reviewing advertised deposit rates and their relationship to reported deposit costs. "Many banks expect negative mix shift to be the primary driver of total deposit cost increases as interest-bearing costs are more stable."

Analysts expect funding costs to continue to creep up despite the easing pressure. Still, with a planned reduction in the pace at which the Fed is shrinking its balance sheet helping the deposit outlook, the Raymond James analysts said, better asset yields "can more than offset rising funding costs."

Deposit migration

Despite movement of money out of non-interest-bearing accounts, aggregate first-quarter deposit flows showed several positive trends.

Total deposits grew by 1.1% sequentially for the second consecutive quarter, and rebounded to year-over-year growth for the first time since the third quarter of 2022.

Sequential growth in non-brokered deposits accelerated in the first quarter. Growth in time deposits slowed further to $69.05 billion, easily overtaken by $247.16 billion in growth in total transaction deposits.

Bank of America Corp. CFO Alastair Borthwick said the bank is seeing "structure" in its deposit base, with consumer balances supported by about 30% growth in nominal GDP since before the pandemic, including a burst of inflation.

Comerica Inc. believes that migration from non-interest-bearing among commercial clients seeking higher rates is largely over.

"If interest rates stay higher for longer, that conversation probably continues throughout the year," Peter Sefzik, chief banking officer, said during the company's earnings conference call. "But I don't think it's at the pace that we saw the last 18 months."

JPMorgan Chase & Co., by contrast, emphasized that it is still capturing rate-seeking consumer balances in high-cost certificates of deposits, and that considerable uncertainties remain.

"In a world where we've got something like $900 billion of deposits paying effectively zero, relatively small changes in the product level reprice can change the NII run rate by a lot," Barnum said during a conference call. "So the error bands here are pretty wide."