The U.S. banking industry has increasingly relied on certificates of deposit to get ahead of rising interest rates, meet funding needs and satisfy growing customer demands.
CDs rose to 13.50% of deposits in the second quarter, up from 12.66% in the first quarter and the recent trough of 12.54% of deposits at year-end 2016.
CDs tend to carry higher rates than other deposit products, but they also allow banks to lock up funds for a certain amount of time. That makes the funding attractive to a number of institutions at this point in the interest rate cycle given that deposit prices are steadily increasing as the Federal Reserve continues to raise interest rates.
Short-term rate increases have pushed the industry's cost of interest-bearing deposits to 0.68% through the first six months of 2018 from 0.49% in 2017. Deposit betas, or the percentage of changes in the federal funds rate that banks pass on to their customers, rose to 36.6% in the 12-month period ended June 30, 2018, compared to 30% in the prior 12-month period.
As deposit costs rose at a quicker pace, a number of large regional banks saw their CDs balance rise considerably in the second quarter. In the period, banks with assets between $50 billion and $250 billion grew CDs the most, increasing the funding source 26.9% from year-ago levels.
SunTrust Banks Inc. is in that group and grew its CD balances by more than 30% from year-ago levels. The company said on its second-quarter earnings call that it has "deliberately" grown CDs as a tool to manage its asset rate sensitivity and limit the pressure on deposit betas.
Another large regional bank, KeyCorp, reported notable growth in CDs, particularly time deposits with balances over $100,000. That is the first product that many retail customers seek as rates move higher, according to KeyCorp CFO Donald Kimble.
"We do have attractive rate offers for those customers that are seeking that to get a little bit better yield. But I don't think that we're out in the market actively campaigning with teaser rates or overstated rate on the time deposit category," Kimble said on the company's second-quarter earnings call.
Banks with assets ranging from $10 billion to $50 billion also reported double-digit growth in CDs in the second quarter, increasing the deposits 17.3% from a year earlier.
Some banks in that group have looked to move funds out of money market accounts into CDs.
BankUnited Inc. said on its second-quarter earnings call that it wanted to push out CD maturities and still found the trade favorable even though it led to larger increases in deposit costs in the period.
"Obviously, rate is higher for a 1-year CD than it is for money market," BankUnited President and CEO Rajinder Singh said on the call. "We make all these decisions based on spreads rather than rates. And we thought 12 months is a better place to be."
Institutions similar in size to BankUnited raised the rates they offer on CDs the most during a recent three-month period. Among banks with assets between $10 billion and $50 billion, the average rate on one-year CDs with minimum balances of $10,000 rose 14 basis points between June 8 and Aug. 24.
That compares to an 11-basis-point increase in the average rate on one-year CDs offered by the broader banking industry during the same period. Between March 16 and June 8, the average rate also rose by 11 basis points across the banking industry.
The higher rate offered by banks with assets between $10 billion and $50 billion implies a deposit beta of 65.8% on one-year CDs during the recent three-month period. That compares to a 47.9% beta on one-year CDs based on the average rate offered across the banking industry during the same time frame.
Some of the higher rates offered by those institutions could come in the form of CD specials — promotional campaigns seeking to attract new funds. Looking at one-year CDs with a minimum balance of $10,000, 483 banks raised rates by more than 25 basis points in the roughly three months following the Fed's June rate increase. The top 50 institutions in that group lifted rates on those products in the range of 102 to 220 basis points.
Click here for a template to help estimate the impact of deposit mix shifts on a bank's "earnings at risk."
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Commercial and savings banks report deposit information on call report Schedule RC-E, while holding companies report such information on Y-9C Schedule HC-E. These schedules can be accessed under the Regulatory Financials section of a company's Briefing Book page on the Market Intelligence website or in MI Office.