The interest rate news has been grim for U.S. banks. The vast majority are asset sensitive, and the swoon in long-term rates followed by a 50 basis point Federal Reserve cut could crunch net interest income in the coming periods. The selloff in bank stocks that began in late February has been far deeper than the one in August 2019 when the Fed started reducing its benchmark rate, thanks to fears that the spread of the coronavirus will trigger a recession and drive up credit losses.
But banks' ability to cut deposit rates so far during the easing cycle offers a silver lining. Overall deposit costs have been nearly as sensitive to declining market rates as they have in the past, despite fears that banks' success in controlling deposit costs when rates were rising would sap their ability to lower them when rates fell.
The industrywide cumulative deposit beta — the change in banks' deposit costs against the change in the effective Fed funds rate during the period — was 15.7% in the fourth quarter of 2019, the first full quarter after the most recent easing cycle began, according to data from S&P Global Market Intelligence. That is below the levels set one quarter into the previous three easing cycles, but not by much. The analysis uses the quarter before an easing or tightening cycle begins as the starting point to measure cumulative betas.
The fourth-quarter 2019 performance, like its predecessors, is also well ahead of initial betas in the previous three tightening cycles, which ranged from negative 8.9% to 7.3%. Once again, it appears that banks have been able to cut deposit prices more quickly than they were forced to raise them when market rates were increasing.
"There's enormous pressure to cut rates on deposits to match the declines that are happening with asset yields," Andrew Frisbie, an executive vice president at the analytics and advisory firm Novantas, said in an interview.
Among commercial customers that received big rate increases during the up cycle, banks have been able to lower prices at betas of around 100%, Frisbie and colleagues wrote in a March 3 report. The big Fed cut now gives banks "air cover to lower rates" for commercial customers that received moderate increases.
Markets and analysts widely expect more cuts from the Fed, including at its next scheduled meeting on March 17-18, as Treasury yields have plummeted to new lows. "There is still a fair amount of room for [deposit] rates to be cut if interest rates were to head toward zero," Frisbie said in the interview.
Among consumers, there is a shift in psychology and less inclination to shop around when rates fall below a certain threshold, Frisbie said. Data collected by Novantas shows that consumers "get somewhat less price sensitive if all of a sudden you can't get a rate that starts with a one."
Commercial clients' tendency to build up precautionary cash cushions amid economic conditions associated with low rates, and less competition from money market alternatives, also give banks more latitude to lower pricing, Frisbie said.
The industrywide cost of deposits was 79 basis points in the fourth quarter of 2019, compared with 24 basis points in the third quarter of 2015, just before the most recent tightening cycle began, according to data from S&P Global Market Intelligence.
Still, banks face competition from online competitors that have aggressive growth targets and "won't take their feet off the gas," keeping upward pressure on promotional rates and forcing banks to be "nimble," Novantas cautioned in the report.
Banks "need to be very surgical in understanding who are the customers where you might be able to cut with a near 100% beta and what customers ... you might need to cut with less ferocity," Frisbie said.
Even before fears about the potential impact of the coronavirus drove interest rates down, banks had described plans to further trim deposit prices, with maturing high-yield certificates of deposits providing a particularly rich opportunity.
Some banks that sat out the rate competition on the way up have less room to maneuver now, and have advised as much. By contrast, banks with exceptionally high betas during the most recent tightening cycle have generally done considerably better than the industry on the way down.
Banks with at least $3 billion of assets that had the 25 highest cumulative deposit betas from the third quarter of 2015 through the first quarter of 2019 posted a median beta of 50.7% for the period. That compares with a median for the entire industry of 15.1% over the same period. The group posted a median cumulative beta of 27% from the second quarter through the fourth quarter of 2019, well ahead of the industry median of negative 1.5% over the same time.
Companies like Goldman Sachs Group Inc., which markets online, high-yield savings accounts to consumers through its Marcus brand, fit the pattern. It had a cumulative beta of 73.9% during the most recent tightening cycle, and a cumulative beta of 35.7% so far in the easing cycle.
Other banks with high betas when rates were rising and that have not yet exhibited high betas on the way down may well play catch-up.
New York Community Bancorp Inc., where CDs make up about a third of interest-bearing liabilities, had a 46.5% cumulative beta during the most recent tightening cycle, but a cumulative beta of just 12.6% so far during the easing cycle. Almost 94% of its CDs are due to reprice in 2020, however, and the bank estimated that a 100-basis-point decline in interest rates would increase its net interest income by 2.52% for the year. Its stock was down by 7.9% from Feb. 19 to March 11, compared with a 33.4% decline for the SNL U.S. Bank and Thrift index.