Banks Slowly Warm Up to Raising Deposit Prices

Deposit rates are inching up as banks position themselves to attract – and keep – their best clients during the first rising rate environment in more than a decade.

Financial institutions quickly increased rates on loans after the Federal Reserve Board hiked the fed funds rate in December, but they have been reluctant to do the same with deposit pricing.

Still, some larger banks, including JPMorgan Chase and U.S. Bancorp, are planning to boost rates for some commercial depositors, and several banks, including some near New York City, have introduced CD rates that top 1%.

Higher rates sometimes provide an indication of a bank's funding needs, said Christopher Marinac, an analyst at FIG Partners. Most banks still have plenty of liquidity, Marinac said, adding that analysts and investors will spend coming quarters trying to determine why certain institutions are finally willing to pay more for deposits.

Since the Fed's rate hike, 6% of all banks have increased rates on money market accounts and two-year CDs with balances of at least $100,000, he wrote in a recent note to clients.

The topic of deposit pricing has come up in a number of quarterly earnings calls.

"Our job, and what we are doing, is paying attention to the competitive landscape" for deposits, Marianne Lake, JPMorgan Chase's chief financial officer, said during the $1.9 trillion-asset New York company's conference call.

The landscape has changed significantly since the Fed last raised rates in 2004. Mobile banking has made it easier for consumers in search of higher yields to move funds between banks, and a slew of nonbank competitors have surfaced.

Other factors that didn't exist 12 years ago could also influence banks' deposit-gathering strategies.

Jim Graves, senior vice president of commercial and small-business deposits at KeyCorp in Cleveland, said during a recent small-business banking conference hosted by American Banker that regulators' stance on liquidity coverage ratios should make demand deposit accounts more appealing. At the same time, the Dodd-Frank Act's repeal of Regulation Q, which lets banks pay interest on commercial checking accounts, could make money market demand accounts obsolete, he said.

Consumer demand could also force banks to move quickly to raise deposit rates.

Banks "have to consider the depositors' perspective," Luanne Cundiff, president of First State Bank of St. Charles in Missouri, said during a panel discussion hosted by the American Bankers Association that took place shortly before the Fed acted. "It has been so long since there has been a movement in rates. Once word of one hits the paper, [depositors] are absolutely going to expect a rate increase."

Still, a meager 25-basis-point increase seems to have had a minimal effect on consumer demand, and rates have mostly held steady on deposit accounts in the past month. The average rate on a two-year CD has risen by just 1 basis point since mid-November, to 0.63%, according to Keefe, Bruyette & Woods. Rates for money market accounts have also risen nominally.

Repricing is "starting a little bit slower than what we would have potentially modeled," said Kathy Rogers, the $411 billion-asset U.S. Bancorp's chief financial officer, said during the Minneapolis company's quarterly call.

Still, some small banks seem intent to get a jump on their competition.

The $5.5 billion-asset Flushing Financial increased rates on its two-year CD by 115 basis points since early December, to 1.3%, according to Marinac's report, which analyzed data from SNL Financial. The $44.9 billion-asset New York Community Bancorp and the $14.9 billion-asset Astoria Financial, which recently agreed to merge, have also boosted rates.

Representatives for New York Community and Astoria declined to comment; Flushing did not respond to a request for comment.

First Colonial Bancorp in Collingswood, N.J., increased the rate on its two-year CD by 75 basis points, to 1.25%. The $446 million-asset company "popped" deposit rates "up a bit" due to steady local competition, said Chief Executive Gerry Banmiller.

Money market rates at Valley National Bancorp in Wayne, N.J., have more than doubled in the last month, reaching 0.45% in early January. The increase is "intended to reinforce Valley's commitment to its consumer and business customer base," a spokesman for the $19.5 billion-asset company said in an email.

Elsewhere, Park Sterling in Charlotte, N.C., has been offering a 1.36% rate for certain money market accounts in Richmond, Va., a market it entered last year. Customers have to sign up for a checking account and electronic statements to quality for the rate.

Any early movement on deposit rates should be viewed with a critical eye, industry observers said. Only a month has passed since the Fed nominally raised rates, and consumers are widely expected be more responsive to future rate hikes.

"I wouldn't read too much into it," Collyn Gilbert, an analyst at KBW, said of Valley National's rate increase, adding that the company doesn't have a strong funding need.

In fact, most bankers are taking a wait-and-see approach.

"Given such a fairly modest increase, the pressure from any part of our depository base has been muted," Grayson Hall, chairman, president and chief executive of Regions Financial, said during the Birmingham, Ala., company's fourth-quarter call. Regions continues to "watch very closely" what its competitors are up to.

Some bankers believe the timing just isn't right to ratchet up pricing.

"We've been very slow to react — or appropriately slow to react — in terms of our own pricing," John Shrewsberry, Wells Fargo's chief financial officer, said during the San Francisco company's earnings call. While other big banks have boosted rates on commercial deposits, the $1.6 trillion-asset Wells is holding off for now, he said.

"We're competing on service," Shrewsbury said. "We're competing on price. We're competing on a lot of things."