Why bank CEOs are growing more optimistic about deposit costs

By Jim Dobbs, Polo Rocha, Jordan Stutts, Kevin Wack

December 7, 2023 6:54 PM

A parade of bank CEOs at an industry conference in New York City this week faced the same pressing question: How soon will rising deposit costs stabilize?

Their answers, which came about a little over a month before banks will report their fourth-quarter results, reflected growing optimism in the industry that the Federal Reserve will hold interest rates steady or start cutting them in the first half of next year, and that banks will benefit as deposit prices plateau.

Truist Financial CEO Bill Rogers expressed what seemed to be the consensus view when he said that deposit betas, which measure the sensitivity of deposit costs to changes in short-term interest rates, are "abating" but not yet "abated."

Some other bank chief executives, who addressed analysts at the Goldman Sachs U.S. Financial Services Conference, spoke about the link between higher deposit costs and sluggish loan volumes. Once deposit costs start to subside, their comments suggested, loan volumes will rise more quickly as banks see opportunities to book more profitable assets.

Across the banking industry in the third quarter, deposit costs rose faster than loan yields, and total loan and lease balances rose by a meager 0.4%, according to Federal Deposit Insurance Corp. data.

What follows is a rundown of the current outlook for deposit costs at six large and midsize U.S. banks.

Ty Wright/Bloomberg

PNC Financial Services Group

PNC said that its deposit costs continue to rise as the company's funding mix shifts more to interest-bearing deposits, but CEO Bill Demchak described the trend as "deposit cost creep" rather than a sharper increase.

He expects the cost increases to run their course in 2024, given that the Fed has not raised rates since July and futures markets have priced in no additional hikes next year.

Demchak said the $557 billion-asset bank is not forecasting "dramatic" loan growth for the foreseeable future. But in the long run, he said, loan growth will resume as funding costs level off.

"I'm not sure if we're going to trough in the first quarter, the second quarter or the third quarter. But what I am sure about is that we are going to trough and we're going to climb out of it and produce record levels of net interest income in 2025," Demchak said.

During the third quarter, PNC's loans averaged $320 billion, which was down 2% from the prior quarter. Deposits were down 1% to $423 billion. The rate the bank paid on interest-bearing deposits increased to 2.26%, up from 1.96% in the prior quarter.

Alex Kent/Bloomberg

Citizens Financial Group

Citizens CEO Bruce Van Saun said that costlier deposits are forcing banks to be more selective about funding new loans.

"Now that deposits are more dear and more expensive, you really have to look at where you're invested on the loan side of your balance sheet," he said.

More selective loan growth at Citizens means reducing exposure to "thin relationships," especially in consumer auto lending, and investing in "thick relationships" that produce better returns, he added.

"We've backed away from leading with price," Van Saun said. "Now, we're focused more on providing service, advice and value."

Still, Van Saun said that Citizens' deposit volume is stable, and its deposit betas are "back in the pack." The majority of new deposits are expected to come from commercial clients, with around one-third going into non-interest-bearing accounts, he said.

Photo taken of front of Synovus regional office in Atlanta area.

Synovus Financial

CEO Kevin Blair predicted that the Columbus, Ga., company's deposit prices will peak in early 2024 as it pays down brokered deposits and as the runoff in non-interest-bearing deposits tapers off.

"The future is predicated on what we see today," Blair said. "And as betas on deposits are slowing, the repricing is slowing, and it allows us to think forward a quarter or two, and we think we'll see the peak of deposit prices."

The $59 billion-asset bank expects its core deposits — excluding brokered deposits — to grow 1% to 2% during the fourth quarter, continuing momentum generated in the third quarter. Interest-bearing deposits continue to account for a larger share of the company's overall funding mix, but at an increasingly modest pace. By extension, the rate of deposit cost increases is easing.

Looking deeper into 2024, Blair said: "If the Fed were to cut rates, we're now positioning the company to be able to cut those deposit rates as fast as we can."

Comerica

Comerica Chairman and CEO Curtis Farmer said that while deposit costs continue to trend upward, they are doing so only "modestly."

The Dallas-based company is "not seeing signs of reacceleration" in deposit costs comparable to what regional banks broadly experienced last spring following a spate of bank failures, Farmer said.

During the third quarter, Comerica's total deposits rose by $1.6 billion to $65.9 billion as the bank paid up to maintain its liquidity. The bank's average cost of interest-bearing deposits jumped 53 basis points to 2.9% between July and September.

Through the first two months of the fourth quarter, average deposits were in line with the third quarter, Comerica said. The $86 billion-asset company continued to grow interest-bearing deposits to maintain its funding levels.

The deposit stability should "position us to refocus" on stronger loan growth in 2024, Farmer said. During the third quarter, Comerica's loans decreased by $1.4 billion from the second quarter to $54 billion.

Wells Fargo

At Wells Fargo, deposit cost pressures have been relatively muted, according to CEO Charlie Scharf, which has helped the megabank outperform its expectations for net interest income.

Wells Fargo's forecasts were "wrong to the benefit of the company," Scharf said. But company executives have to be a "little bit humble" about the path forward, given that it's not clear where rates are going and how depositors will respond, he said.

"I'm never going to stand here and be too definitive because we don't know the path of rates," he said.

For now, Wells has been pleasantly surprised by the level of deposits flowing into the bank, as well as the low level of depositors leaving for higher-paying options.

"We don't have a lot of rate seekers," Scharf said. "People bank with us for lots of reasons, of which rate is just one."

Still, Scharf cautioned that rates staying "higher for longer" would prompt more customers to think about the rates they're getting paid on their cash.

Rather than repricing all deposits, Wells Fargo bankers are "trying to be very smart about how to make sure that we pass on rate to those that really care about it."

"It's a very long way of saying we'd expect our competitive advantage to continue," Scharf said, though he also cautioned that "we would expect deposits to continue to become more rate-sensitive over a period of time if rates are higher for longer."

First Horizon

First Horizon was aggressive in its deposit-gathering after its scuttled merger with TD Bank, but next year it should be able to "walk back deposit costs," said Chief Financial Officer Hope Dmuchowski.

In the meantime, other banks are "just starting to come up to where we are" on deposit rates, she added.

Across the industry, competition for deposits appears to be moderating, partly because more tepid loan growth numbers mean banks need less cash to fund loans, First Horizon CEO Bryan Jordan added.

"We're in a competitive marketplace, and there are a lot of dynamics at play," Jordan said. "But it does feel like the deposit betas have sort of run their cycle."

Markets' increased expectations for Fed rate cuts are also leading to a shift in First Horizon's strategy of offering promotional rates on certificates of deposit. The Memphis, Tennessee-based company is now paying higher promotional rates on three-month CDs, rather than those with six-month terms, so that it's not stuck paying higher rates for additional months if the Fed cuts rates soon.

"It gives you a lot more elasticity at the end of the day, if rates start moving at a rapid pace," Jordan said.

Allissa Kline contributed to this report.