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US banks: Fed rate rise adds pressure to reward deposits better

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A further increase in interest rates from the US Federal Reserve should be good news for bank stocks. But higher rates are both a blessing and a curse. Banks can make more money from lending. The flipside is that customers want more for their savings.

Some have started to move their money into higher-yielding Treasuries and money market accounts. Net interest income and margins, which grew strongly during the third quarter, may have peaked.

Deposits across US banks have fallen by more than $461bn since late August to $17.6tn, according to Federal Reserve data. That is still a tidy sum, and about a third higher than before the pandemic. The bulk is in individual checking and savings accounts, earning little interest.

The average national savings rate stands at 0.24 per cent, according to the Federal Deposit Insurance Corp. While that is quadruple the 0.06 per cent level at the start of the year, it is paltry compared with mortgage rates. These have more than doubled this year to hit 7 per cent last month.

Banks count on customer inertia to keep payouts on saving accounts low. The pace of deposit outflows, if sustained, could change that dynamic. Banks will have to lure deposits with higher rates.

Already, their funding costs more than doubled to 0.6 per cent during the third quarter, data from S&P Global Market Intelligence show.

Big lenders such as JPMorgan and Bank of America can afford to shed some of the deposits they amassed during the pandemic. Small and midsized banks need low-cost deposits more. Still, there are signs that even big Wall Street banks are feeling the pressure to compete for cash. Citigroup is offering 4.15 per cent on a 12-month CD, even as rates on its basic savings account sit at 0.05 per cent.

The KBW Regional Banking Index is down only 10.5 per cent this year, compared with a 35 per cent decline for the broader KBW Bank Index. Bank investors have long focused on metrics like return on equity and efficiency ratios. They should add deposit rate sensitivity to earnings models if they have not already done so.

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