With the Federal Reserve’s recent interest rate cuts taking effect, US banks are preparing to reduce interest payments on corporate deposits.
With the Federal Reserve deciding to cut its benchmark interest rate by 50 basis points in September, the first reduction in four years, U.S. financial institutions are focusing on corporate deposits as a key area to maintain profit margins amid falling interest rates. The report said that. Financial Times.
Corporate deposit rates come under pressure
Banks have increased interest payments on deposits to retain customers following the Federal Reserve’s rapid interest rate hikes from 2022 to early 2023.
As the benchmark interest rate rose to a 23-year high, corporate depositors in particular saw their account interest rates rise sharply due to Fed policy, the FT reported. These accounts became an important tool for banks to raise and hold capital, and prevented companies from moving their money to higher-yield alternatives like money market funds.
With recent interest rate cuts and further rate cuts in the coming months, U.S. banks are now focused on reducing costs associated with these corporate deposits.
Several industry executives agree with this opinion. Bruce Van Thorne, CEO of Citizen Financial Group CFG, told the FT that banks were aggressively lowering the price of deposits in corporate accounts because they were “asking for every penny along the way”. He said he was there.
This trend is likely to continue, with some predicting that the Fed’s interest rates could fall from 5% to around 3% by 2026.
Banks take advantage of flexibility as loan demand slumps
The environment of falling interest rates coincides with weak demand for loans.
This put pressure on banks’ net interest income, but gave them more flexibility in adjusting deposit rates.
Barclays research analyst Jason Goldberg told the FT: “It’s still very early in the cycle, but banks are certainly starting to take action shortly before the Fed rate cut in mid-September. ” he said.
Eye margin protection for small and medium sized banks
Smaller and medium-sized U.S. banks are under intense pressure to raise interest rates on savings accounts to prevent customers from moving their money to other banks.
The competition has been especially tough for local banks, but big banks like JPMorgan Chase & Co.’s JPM and Bank of America’s BAC have had an advantage. Nearly a third of JPMorgan’s deposits are interest-free, according to the FT report.
Citizens Financial, which has about $175 billion in deposits, is one regional company that has adopted a sophisticated model to balance customer retention with lower deposit rates.
Van Saun said the bank takes a “very scientific” approach to pricing deposits, ensuring interest rates are high enough to keep corporate customers happy but not high enough to hurt profitability. He reportedly said he was trying to avoid high interest rates.
Impact on bank stocks
Shares of major U.S. financial institutions tracked by the Financial Select Sector SPDR Fund XLF are trading at record highs after strong third-quarter results.
Major banks such as JPMorgan Chase & Co., Goldman Sachs Group GS, Bank of America, Citigroup C, Morgan Stanley MS, and Wells Fargo & Co. WFC all reported higher-than-expected profits and shareholders. brightened the outlook.
For these large institutions, the planned reduction in corporate deposit rates could further boost profit margins, or at least help maintain profitability. Due to its size and perceived security, such a move is unlikely to result in a major withdrawal, giving it a strategic advantage.
In contrast, smaller banks, represented by the SPDR S&P Regional Bank ETF KRE, have less flexibility to lower interest rates on corporate deposits without risking customer attrition.
Increasing competition in this space has put these banks in a more precarious position, and overly aggressive cuts could prompt corporate depositors to take their funds elsewhere. As a result, these institutions may face pressure on profit margins to keep depositors happy.
There may be a silver lining. For local banks, lower interest rates could stimulate demand for loans and increase lending volumes, potentially offsetting pressure on deposit funding costs.
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