Deposits repriced faster at some of the nation's largest banks during the third quarter but slowed from the recent peak two quarters ago.
Deposit costs continued to move higher at large U.S. banks in the third quarter along with further rate increases by the Federal Reserve. Deposit betas, or the percentage of changes in the Fed funds rate that banks pass on to their customers during a one-year period, rose at the most of the largest banks in the third quarter from the levels reported in the second quarter.
The median deposit beta recorded by the Big Four banks was 38% in the third quarter, up 3.98 percentage points from the second quarter's 34%. In the first quarter of 2018, the median beta was 30%, representing a quarter-over-quarter increase of 4.91 percentage points.
Big banks attributed the slowing rate of change to holding the line on retail deposits even as some commercial and wealth deposits repriced. Other banks took advantage of the third quarter's rate movement to bring in new business and lock in funding at current rates. Customers at the largest banks have also continued to shift funds from noninterest-bearing deposit accounts to interest-bearing accounts throughout the last five quarters, according to an S&P Global Market Intelligence analysis.
Betas so far have grown "at a relatively slower pace" in the third quarter, wrote Nomura Instinet analyst Bill Carcache in an Oct. 15 report. Carcache wrote that the rise in deposit betas should be "gradual," especially given low loan-to-deposit ratios at big banks.
JPMorgan Chase & Co.'s cost of interest-bearing deposits rose 29 basis points year over year to 0.61% in the third quarter, equating to a beta of 38% for the last 12 months. One way JPMorgan has kept its deposit rates in check is to simply not compete on price. CFO Marianne Lake said the rate and pace of deposit increases have become "increasingly less important" for retail customers compared to other account features. Instead, the bank offers a suite of digital and mobile capabilities to make banking more convenient or simple. She said efforts and investments that are intended to make the retail relationship less rate-dependent might make this normalization cycle "look a little different" at JPMorgan.
"That's how we think about our strategy for deposit [repricing], and it's sort of largely behaving as we would have expected," she said.
Wells Fargo & Co. recorded a beta of 38% as the cost of interest-bearing deposits grew 29 basis points year over year to 0.66% in the third quarter. CFO John Shrewsberry said some of the increase stemmed from wholesale banking, which grew deposits by $9.1 billion from the second quarter after executives made "targeted adjustments" to its pricing. Betas for consumer and small-business deposits held steady.
The rate Bank of America Corp. paid on interest-bearing deposits has risen 25 basis points in the last 12 months, to 0.55% in the third quarter. Bank of America recorded a deposit beta of 32% for the third quarter. The bank has been raising rates in its investment banking and global wealth and investment management units, and deposits in global banking have shifted from noninterest-bearing accounts to interest-bearing ones.
However, Bank of America has taken little to no action on traditional consumer banking accounts and is relying instead on its value proposition. But CFO Paul Donofrio said the bank is willing to revisit that approach as rates continue to rise.
"At some point, rates are going to rise in consumer as well. Our focus is on balancing our customers' needs with the competitive marketplace and our shareholders' interest," he said. "And we'll do the right thing."
First Republic Bank responded to the rising interest rate environment by locking in term funding, adding $1.1 billion in certificates of deposit from the previous quarter. The bank couples CDs with checking accounts, which make up a majority of total deposits in the quarter and paid 5 basis points in the third quarter, in a type of a "barbell" strategy that pairs a product with a short-term maturity with a longer-term one. The average original term on these CDs is 18 months, which President Hafize Gaye Erkan said is "good risk management" in a rising rate environment.
Future repricing on consumer accounts will fuel subsequent changes in the deposit beta reported by PNC Financial Services Group Inc., said CFO Robert Reilly. The bank recorded a beta of 44% for the third quarter as the cost of interest-bearing deposits grew 34 basis points year over year to 0.71% in the third quarter.
"On the consumer side, we're seeing a shift to savings — which we've seen for some time — and now the beginnings of time deposits, which is natural and what you would expect," he said. "On the commercial side, we are seeing somewhat of a shift from noninterest-bearing to interest bearing. Again, all reflective of a higher rate environment."
For further recent reporting on deposits, check out:
For First Republic, CDs becoming 'attractive deposit gathering vehicle'
Deposit betas exceed loan betas at US community banks
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