Deposit cost pressures stabilize ahead of anticipated September rate cut

Deposit cost increases continued to moderate according to comprehensive data on US banks for the second quarter, with markets anticipating an interest rate cut by the Federal Reserve in September that could bring additional relief.

Overall funding costs increased 8 basis points sequentially to 2.63%, flat with the sequential increase of 8 basis points in the first quarter, according to data from S&P Global Market Intelligence.

The cost of savings deposits, the largest category, increased 8 basis points sequentially to 1.98%, down from a sequential increase of 11 basis points in the first quarter. The peak sequential increase during the recent rate-tightening cycle was 41 basis points in the fourth quarter of 2022.

The cost of interest-bearing transaction deposits increased 4 basis points sequentially to 3.18% after a decline in the first quarter, but remained below the 2023 fourth quarter's 3.20%.

Upward pressures on deposit costs are likely to persist even with a rate cut since deposit costs overall would still be substantially less than wholesale rates. However, banks have been saying they expect prices on particularly rate-sensitive balances such as in commercial accounts to fall quickly with cuts, and many banks have already been reining in prices on their highest-cost offerings.

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Signs of a peak

Citizens Financial Group Inc. said it is very likely that it is already past the peak in its deposit costs after posting a sequential decline of 1 basis point in the second quarter. The bank said it had success in pricing maturing certificates of deposits (CDs) lower, and that it expects its beta, or the change in its deposit costs relative to underlying rates, to be about the same on the way down as it was on the way up after an initial lag.

M&T Bank Corp.'s cost of deposits were flat sequentially and its cost of interest-bearing deposits declined 3 basis points sequentially, with CFO Daryl Bible saying pricing competition is more rational.

Data on employment and inflation has led to market expectations for faster rate cuts since banks' second-quarter financial reports.

In an Aug. 15 note, BofA Global Research analysts said 9 of the 20 banks it tracks weekly had cut rates paid on high-yield savings accounts or one-year CDs that week. "Such actions signify management teams taking advantage of the increased confidence in the trajectory of short-term rates."

Deposit declines

Deposits and bank balance sheets overall declined in the second quarter.

The deposit contraction reflected seasonal factors, however. Year-over-year deposit growth has "been holding pretty steady" at close to 1.5%, Piper Sandler analysts said in an Aug. 18 note on weekly Fed data. "Deposit growth is stable, but at a weak rate."

Data on deposit levels also shows banks pulling back on some types of high-cost categories. Overall, deposits contracted 1.1% sequentially to $17.338 trillion, while time deposits in accounts with balances of more than $250,000 declined 4.6% to $906.36 billion.

"Deposit growth slowed from [the first quarter], although mix-shift trends have started to stabilize," Jefferies analysts said in an Aug. 21 note, referring to the migration from low-cost to high-cost accounts. "We still expect deposit growth to come from interest-bearing accounts as long as interest rates remain relatively high and customers spend operating cash."