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U.S. banks are considering aggressively cutting interest payments for corporate depositors in order to protect profit margins after the Federal Reserve Board (Fed) lowered benchmark lending rates.
Financial institutions have been offering savers favorable rates since 2022, as the Federal Reserve raised its benchmark interest rate to a 23-year high and discouraged customers from moving their cash to other banks or money market funds. .
Corporate bank customers were some of the biggest beneficiaries, demanding and receiving deposit payments that rose in line with the Fed’s benchmark interest rate.
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After last month’s first interest rate cut in more than four years, some banks identified business accounts as the accounts most exposed to changes in savings rates.
“Corporate rates are (falling) faster than expected and faster than consumer deposit rates,” said Scott Hildenbrand, chief balance sheet strategist at Piper Sandler.
The Fed’s 50 basis point rate cut is expected to be the first in a series of cuts. Policymakers said interest rates could eventually fall from about 5% to about 3% by 2026.
“On the corporate books, you can bring down the price (of deposits) faster, because they were asking for every penny on the way up,” said the Rhode Island-based company, which has about $175 billion in assets. Bruce Van Thorne, CEO of Citizens Financial, a regional lender that owns the company, said. He told the Financial Times that he had money in the bank.
Tim Spence, CEO of Cincinnati, Ohio-based Fifth Third Bank, told the FT: “Corporate customers stand to gain the most from rising interest rates, so it makes sense that they should see them fall. ” he said.
That view was echoed by Michael Santomassimo, finance chief at Wells Fargo, the third-largest U.S. bank by deposits.
“We’re seeing the results we expected for our most interest rate sensitive deposits,” Santomassimo said last week on Wells’ third-quarter earnings call. “So on the commercial side, the beta is exactly what we thought it would be as interest rates started coming down, which is pretty high for those deposits. So, it’s working.”
Deposit beta measures how much a bank passes changes in interest rate policy to customers.
Interest income took a hit due to weak demand for loans. But because banks don’t need deposits right away to fund new loans, they have more flexibility to lower the amount they pay depositors.
“It’s still early in the cycle, but banks certainly started taking action shortly before the Fed cut in mid-September, and will certainly add more after the Fed cut,” said Jason Goldberg, a research analyst at Barclays. We’re seeing action.” “I would say we are in the early stages of this down-beta cycle.”
Bank deposits are the main source of funds. The pressure to raise savings rates to retain customers is especially acute for smaller and smaller U.S. financial institutions. Large financial institutions like JPMorgan Chase and Bank of America are perceived to be safe and benefit from nationwide branch networks.
About 32% of JPMorgan’s $1.9 trillion in U.S. deposits earn no interest, while Citizens pays no interest on about a fifth of its deposits, resulting in cheaper capital for JPMorgan. will gather more.
Mr Van Saung said he was taking a “very scientific” approach to measuring the best way to price deposits to ensure people kept their deposits in the bank.
“We have all kinds of behavioral models across all the different deposit products that we have,” he said. “Essentially, you’re trying to predict the interest rate that customers need to feel comfortable putting their money in the bank, but not paying significantly more than that.”