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Funding costs at large institutions with big proportions of time deposits have been closing in on funding costs at peers, and maturing certificates of deposit are set to continue to buffer net interest margins.
September 26 -
Big bank margins have contracted for five consecutive quarters, and are poised to shrink again during the current period amid a continuing buildup of deposits and a flatter yield curve.
August 31
The funding premium paid by regional banks that rely heavily on time deposits has narrowed, and low rates are poised to help these companies further catch up with peers.
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As such accounts have matured and portfolios gravitate toward market interest rates, the average cost of funds at the 10 regionals with the highest ratios of time deposits to assets at June 30 fell 73 basis points from the third quarter of 2009 to 1.43% in the second quarter, according to data from Financial Information Systems. That was still almost twice the average for the 10 with the lowest ratios (see charts).
Companies like Cathay General Bancorp, which funds 30% of its assets with time deposit accounts with balances of $100,000 or more, could be among a minority within the industry set for an expansion in net interest margins as low rates drag on.
Meanwhile, companies like Cullen/Frost Bankers Inc., which paid an annual rate of 46 basis points to fund its assets in the second quarter, and City National Corp., which paid 42 basis points, have little room left to reduce deposit prices.
To be sure, low rates are intertwined with economic weakness and anemic demand for credit. With much of the funding likely to be channeled into bonds with slim spreads instead of loans, "deposits have more limited value" in the current environment, say analysts at Keefe Bruyette & Woods. "Banks will begin to choose to cut some expenses out of their branch networks and possibly close branches."
