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Fitch tests deposit rates; hypothetical increase lowers income by up to 17%

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Fitch tests deposit rates; hypothetical increase lowers income by up to 17%

U.S. banks, by and large, have managed to keep deposit rates at historically low levels. But Fitch Ratings warns that they should prepare for a hit to profitability and net interest margins if forced to compete with online rivals.

Third-quarter data, based on Federal Deposit Insurance Corp. disclosures, showed that depository institutions offered an average interest of 7 basis points on retail savings deposits and money market deposit accounts lower than $100,000. Online banks, on the other hand, gave 118 basis points.

The rating agency came up with two hypothetical shock scenarios to illustrate how large banks might fare if they became more competitive on deposit rates. The tests, which assume no change in market rates or asset yields, show that a rate of 75 basis points on retail deposits would raise interest expenses for the large commercial banks to $7.6 billion, decreasing their pretax income by $4.9 billion, or 11%.

And if the deposit rate were at 118 basis points, interest expenses rise to $10.7 billion, leading to a 17% drop in income, pretax.

That said, Fitch expects no significant near-term increase in deposit rates at the large commercial banks, said Fitch's Jonathan Boise, associate director for macro credit research. In addition, the banks are "mainly asset sensitive," noted Christopher Wolfe, managing director for financial institutions. Asset repricing is therefore expected to offset deposit beta increases.

Furthermore, large banks have other tools to combat online bank pricing, including physical branches, brand recognition and diversified services.

Fitch believes the Federal Reserve is on pace for a December rate hike.