A growing outflow of deposits is starting to cause headaches for some banks, forcing them to play defense in order to maintain enough cash to make loans.
The quickly shifting picture — an effect of the Federal Reserve's rapid interest rate increases — is prompting many banks to raise their deposit rates to prevent customers from leaving for higher-yielding alternatives.
Some depositories are also filling in the gaps by turning to costlier options, such as the brokered deposit market or
The actions will take a bite out of banks' earnings in the coming months, raising their funding costs and limiting how much they can profit from the higher rates they're charging on loans. The current environment marks a sea change from what banks experienced for much of the pandemic — a deposit glut as consumers and businesses built up large cash buffers.
Some banks have been more successful than others in keeping deposit costs down. But all of them are realizing that they can no longer sit still, and will instead have to fight to keep deposits, said Matt Pieniazek, president and CEO of Darling Consulting Group.
That's because inflation has prompted the Fed to hike interest rates back to 2008 levels, which has led to interest rates on some investments, such as money market funds and Treasury securities, that are more attractive than lower-yielding deposits.
With the Fed's benchmark rate at almost 4%, it will be "hard to tell your customer that they deserve" to get paid just above 0% for their savings, said Chris McGratty, head of U.S. banking research at Keefe, Bruyette & Woods.
Executives at banks large and small — ranging from the biggest in the country to the $12.3 billion-asset First Foundation Inc. in Dallas — have acknowledged in recent weeks that the deposit market has gotten more competitive or that it will soon heat up.
"It's tough out there, and we recognize it's a dogfight," Scott Kavanaugh, CEO of First Foundation, said on an earnings call last month.
First Foundation is one of several banks where the loan-to-deposit ratio climbed above 100% during the third quarter — as loans exhibited strong growth but deposits were mostly flat. Though the bank is planning to tap the brakes on loan growth, it is also fighting to attract new depositors and retain existing ones. And it is borrowing more from the Home Loan bank System.
The picture looked similar at Denver-based First Western Financial, where loan growth caused the loan-to-deposit ratio jump to about 109%. The bank is "very focused on getting that number back to 100% and hopefully below," CEO Scott Wylie said on a third-quarter earnings call.
First Western has turned to the Home Loan Bank System for funding, and it is adjusting its incentive compensation to reward bankers who bring in more deposits.
Likewise, Maryland-based Sandy Spring Bancorp is adding "incentives for every sales person to drive deposits," CEO Daniel Schrider told analysts. It is also offering special rates on certificates of deposit.
Signs of looming deposit pressures
Two regional banks that are feeling more deposit pain than others — the tech-focused
While deposit rate increases have been
About 9% of banks were paying savers more than 0.5% for their savings and money market accounts in May, but by September that figure had jumped to 28%, according to Curinos.
The firm also found that online banks — which pay savers higher rates partly because they have few or no branches — are enjoying deposit inflows as traditional banks' retail deposits stay flat or decline. At Discover Financial Services, which operates an online bank, consumer deposits grew 5% from last quarter, while competitor Synchrony Financial reported an increase of nearly 6% in deposits.
That growth is not free, as both companies raised their rates
Depositors at Texas-based Third Coast Bancshares appear to have noticed the new environment.
"I have just never had so many rate shoppers in my career, where just any random depositor is finding some rate on the internet and calling us and saying, 'Hey, I want this,' " Chief Financial Officer John McWhorter said during a recent earnings call. He added that the bank has been "compelled to match" higher rates for its larger accounts.
So far, large traditional banks have shown little concern about the deposit picture, but their executives have pointed in recent weeks to early signs of deposit cost increases.
"You're starting to see a little bit of movement on rate as our customers seek some rate alternatives or are looking for high rate," Mary Mack, Wells Fargo's CEO of consumer and small-business banking, said at an industry conference this month.
The industry is in the "early stages" of a shift, but consumer deposits remain "pretty stable and pretty sticky," Darren King, chief financial officer at M&T Bank, said at the same conference. "Net-net, though, the story is pretty clear about what's going to happen … funding costs are going up," he said.
Kalispell, Montana-based Glacier Bancorp has so far been able to hold the line on deposit rates, but "there is pressure building," Treasurer Byron Pollan told analysts on the company's third-quarter earnings call.
"We're 300 basis points into a rising rate cycle and more to go," Pollan said in comments last month, before the Fed hiked rates by another 75 basis points. "So we're not immune from that. We can't defy gravity with regard to deposit costs forever."
