When the Federal Reserve raised benchmark interest rates last month, it took North Carolina lender Branch Banking & Trust Corp. less than an hour to announce it was passing that cost along to borrowers. Depositors, however, have yet to see the benefit.
For many investors, that means U.S. banks are about to feast on rising interest rates -- profiting from a fatter margin between what they charge for loans and the rewards offered to depositors who provide the funds. Now, a small but growing chorus of senior executives and analysts is signaling that resolve may fray and that shareholder optimism is too high.
Banks are under pressure to break ranks and compete for deposits. Compared with past cycles, more savers are Web-savvy -- able to comparison shop and transfer money online to firms offering better rates. Money-market funds that suffered for years with near-zero rates are eager to lure back customers. And new liquidity rules encourage banks to draw more funding from consumer deposits, pushing lenders to fight for those clients.
"We've never really seen this movie before," JPMorgan Chase & Co. Chief Financial Officer Marianne Lake warned investors in February. Lenders are "coming off of zero-bound rates in a world where liquidity requirements and technology advancements will increase the competition to get deposits and where customers are more rate-aware."
In recent research notes, analysts said they will listen carefully for U.S. bank leaders to project deposit rates when their companies start reporting first-quarter results on Thursday. Net income at the nation's six biggest banks -- JPMorgan, Citigroup Inc., Bank of America Corp., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley -- will probably climb 15 percent to $21.3 billion in the period, helped by improvement in net interest margins, according to estimates compiled by Bloomberg.
But many analysts are underestimating the speed at which banks may need to increase their so-called deposit beta, the share of Fed rate increases that banks say will get passed along to depositors, according to U.S. Bancorp Chief Operating Officer Andy Cecere, who will become chief executive officer of the nation's largest regional lender next Tuesday.
Cecere laid out this argument in an interview: For years, with interest rates near zero, money-market funds whittled costs and waived fees to keep clients. After March, when the Fed raised rates by a quarter-point for the third time since the 2008 financial crisis, fees are back. That means funds can share future Fed increases more liberally with customers. And that changes the game for banks.
"Competition against waivers meant banks were holding deposit betas," Cecere said. "Now, the competition for those consumer deposits will increase rates."
Wall Street trading will also drive bank earnings in the first quarter. Analysts estimate that dealings in the fixed-income market, currencies and commodities probably increased at Morgan Stanley, Goldman Sachs and JPMorgan, but that those dealings were offset by declines in revenue from equities.
But interest rates have been a major theme for shareholders in recent months. Financial stocks soared after Donald Trump's election on speculation he will ease rules and pursue policies that spur inflation and lift long-term rates, helping banks earn more from lending.
A key question is whether deposits are still as "sticky" as they have been for decades, or whether customers -- freed from going to branches to deal with tellers -- will demand higher returns to stick around. Small deviations in beta can help or hurt banks' bottom lines.
JPMorgan's Lake told investors in February that the bank modeled a scenario in which the Fed raises rates by a quarter-point twice a year through 2018, and once in 2019. If the lender passes along more than half of that increase to depositors -- a beta of more than 50 percent -- it would reap $11 billion more revenue from interest, she said.
Banks realize that consumers' patience won't last very long, said Ray Montague, director of deposit product research at Informa Research Services. His clients include bank executives who set rates to remain competitive. Some who used to request his research monthly now ask for it once a week, he said. Those who got it weekly are now asking for it twice a week or even daily. The fear is that consumer behavior might change fast.
"As there's more pressure, more hype, more news about increased rates, I think there's going to be more sense that 'I need to actually start shopping around looking for the best rate,'" Montague said. "That's what's going to rattle the banks."
Business on 04/11/2017