US banks lower CD rates as deposit costs peak

US banks cautiously move to lower their cost of deposits as the industry prepares for potential rate cuts.

The Federal Reserve's rapid increase in interest rates to curb inflation pushed US banks to offer high rates on deposit products such as certificates of deposits (CDs). Many customers accustomed to lower rates became more aggressive in moving their money into higher interest-paying accounts putting pressure on bank margins and a heated deposit competition.

While deposits remain precious, many banks have begun trimming deposit rates cautiously, as they await rate cuts, to ease pressure on funding costs. As of Sept. 6, 790 banks had marketed an average rate of more than 4% on a one-year $10,000 CD compared to 824 banks as of June 21, down for the first time in S&P Global Market Intelligence's quarterly analysis since 2022. The number of banks offering rates of 5% or more also roughly halved from the previous analysis to 72 as of Sept. 6.

Moreover, banks cutting deposit rates also outpaced the number of banks increasing rates during the period. Over 530 banks marketed a lower rate on a one-year $10,000 CD compared to June 21, while only 262 banks offered a higher rate.

Growth in CD balances slows, brokered deposits decline

CD balances at US banks grew 1.4% during the second quarter to $2.980 trillion as of June 30, while total deposits were down 1.0%. COVID-era stimulus helped push the CD concentration down to 6.3% of total deposits at the end of the first quarter of 2022, however, the CD balances have since risen 130% or $1.733 trillion, pushing the concentration to 15.8% as of June 30.

Brokered deposits declined for the second consecutive quarter to $1.329 trillion, while Federal Home Loan Bank advances rose 1.3% to $549.70 billion as of June 30. On July 30, the Federal Deposit Insurance Corp. proposed a new rule revising the classification of brokered deposits. Under the revised laws, some core deposits would be reclassified as brokered deposits.

Of 335 banks with at least $500 million in CD balances and a loan-to-deposits ratio greater than 25% as of June 30, 215 reported a quarter-over-quarter increase in CD concentration.

Provident Financial Services Inc. reported the largest increase in CD concentration of 6.5 percentage points during the quarter to 16.7% as of June 30. The increase was partly due to its acquisition of Lakeland Bancorp Inc. during the quarter. Despite the increase, Provident's CD concentration remains below the industry median of 28.8% at the end of the second quarter.

Deposits tick up in Q3

Deposits at domestically chartered US commercial banks grew 0.6% during the third quarter through Sept. 4, according to seasonally adjusted data in the Federal Reserve's H.8 report on bank assets and liabilities. On the other hand, large time deposits were up 1.4% since June 26 and 3.6% since year-end 2023.

Borrowings were down 3.6% while loan growth remained muted at 0.2% since June 26.