Earnings season is still young, but last week’s reports make it clear some banking companies are finding deposits harder to come by and are either paying more for them or going to the wholesale markets to fund loans.
Among the companies resorting to higher-cost wholesale deposits are Fifth Third Bancorp, BB&T Corp., and Marshall & Ilsley Corp. Some experienced pressure on net interest spreads as a result.
Scott Reed, BB&T’s chief financial officer, told analysts during an April 13 conference call that it decided to use short-term borrowings such as federal funds and repos rather than issue higher-priced certificates of deposit.
BB&T’s fed funds balance increased $2.5 billion; the Winston-Salem, N.C., company said all of that increase went into funding loan growth. BB&T’s loans grew 7.8% in the first quarter, to $69.4 billion.
The average interest rate BB&T paid on deposits rose 25 basis points from the fourth quarter, while its cost of fed funds and other borrowings rose 54 basis points, Mr. Reed said.
“So the pressure on the funding side and the cost side continues to run ahead of the rise in yield on variable-rate loans and our ability to reprice our securities portfolio,” he said.
BB&T’s net interest margin fell 2 basis points, to 3.95%.
Marshal & Ilsley, the first large banking company to report earnings last week, said its net interest margin was lower, primarily because loans grew beyond its capacity to generate positive deposit growth at or below the wholesale cost of funds.
Loans and leases rose 17.4%, to $30.6 billion, while deposits grew just 5%, to $18.4 billion. However, wholesale deposits jumped 37%, to $6.8 million.
“Should loan growth continue at or near this pace, and should pricing pressures on both loans and deposits not moderate, we would expect continued modest downward pressure on the net interest margin percentage,” John Presley, the Milwaukee company’s chief financial officer, told analysts.
Wholesale sources are funding a good part of current loan growth, but Fifth Third’s CFO, Mark Graf, said the Cincinnati company was willing to pay higher rates to raise retail deposits.
That was not the case at Wachovia Corp. On an earnings call Friday, Benjamin P. Jenkins 3d, the Charlotte company’s head of consumer and commercial banking, acknowledged the building competition for deposits, particularly in the Northeast and Florida, but he said his company is trying to avoid a price war.
“We’re not a company that drives our deposit growth with pricing. We try to be competitive, but try not to get caught up in that,” Mr. Jenkins said. “I’m pleased that we’ve had the kind of retail deposit growth that we’ve had even as the markets got more competitive.”
In a report published April 13, Andrew Collins, a Piper Jaffray & Co. analyst, said the Federal Reserve’s sustained increases in short-term interest rates are finally having a meaningful effect on deposit-based funding costs.
Since the beginning of the year, sensitivity to the Fed’s rate changes has increased, particularly in savings accounts and money market-related products, according to Mr. Collins. On average, roughly 106% of the Fed’s 50-basis-point increase this year has been reflected in deposit pricing, versus only 25% of the Fed’s 125-basis-point increase last year, he wrote.
“We anticipate deposit funding costs closely mimicking fed funds rate increases … which could translate into significant margin and earnings pressure at some spread-based lenders,” such as Commerce Bancorp Inc., SunTrust Banks Inc., and Wachovia, he wrote.
Pressure on interest margins was further worsened for some banks because competition also affected loan pricing.
Mr. Presley said M&I decided to pass on some loan deals where the spreads got too tight, and he predicted pricing pressure may slow future growth.
“Our continued commitment to financially sound pricing discipline and an environment of this tightening credit spreads makes it difficult for the company to project loan growth to continue at the current pace,” he said.
Henry Meyer, the chief executive officer of KeyCorp, sounded a similar note of caution.
He told analysts during an earnings conference call Friday that loan pricing is now very aggressive. “We are much more concerned about whether we’re starting to see credit quality — some of the terms and conditions of the underwriting — being affected.”
