Banking companies continued to battle thinning margins and one another in the second quarter, as deposit pricing competition persisted.
For the first time in recent memory, bankers in the Southeast discussed pricing pressure in their earnings presentations. And bankers from companies large and small and from all regions said in their earnings calls that deposit gathering is a concern as they fund loan growth amid rising interest rates.
The Federal Reserve has raised the federal funds rate 17 consecutive times, to 5.25% in June. Bankers said that even if the Fed hikes stop, deposit pricing will probably remain an issue, and analysts said funding will continue to be a big differentiator.
Banking companies in the Midwest and West have long been embroiled in a struggle over deposit pricing, but the second-quarter results revealed that the Southeast has become a hotly contested market for funding. In every region the mix migrated to higher-cost products such as certificates of deposit.
L. Phillip Humann, the chairman and CEO at SunTrust Banks Inc. in Atlanta, said the business climate reminds him of the late 1990s.
“This shift … is largely the result of the rate cycle we are in,” he said on the $181 billion-asset company’s earnings call. “When you have rising rates and improving stock market conditions, customers have increasingly attractive investment alternatives.”
SunTrust’s margin fell 12 basis points from the end of the first quarter, to 3%. It is not alone.
The nation’s largest banking companies — Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., Wachovia Corp., and Wells Fargo & Co. — all reported that margins were thinner than in the first quarter.
Charles O. Prince, Citigroup’s chairman and chief executive, said on Citi’s earnings call that it has added more than $4.7 billion of new deposits through an online offer launched in March. The deposits pay higher rates.
Bank of America chief financial officer Alvaro G. de Molina blamed some of his company’s margin compression on higher deposit pricing.
Regional banking companies fared no better. Their average rate for core interest-bearing deposits reached 2.28%, according to data compiled by Banc of America Securities LLC. The average was 2.08% in the first quarter and 1.32% in last year’s second quarter.
Kenneth Usdin, an analyst at Banc of America Securities, said that banks are having a harder time keeping deposit rates low.
“That was coming through loud and clear” in the second quarter, he said. “We’re in the middle innings of a mix shift that I don’t think is close to being done.”
Kevin Fitzsimmons, an analyst at Sandler O’Neill & Partners LP, said the Midwest and West still have the most intense pricing pressure, though competition has “ratcheted up” in every region.
“We’ve probably hit an inflection point where going forward, funding is going to be the big differentiator among banks,” he said.
Margins in the Southeast had for the most part been stable through the first quarter. Mr. Fitzsimmons said margins among regional banking companies there had a median decline of 3 basis points in the second quarter compared with the first.
Earnings calls also showed that more executives in the Southeast worry that the interest rate environment could have a lingering impact on margins.
D. Paul Jones, Compass Bancshares Inc.’s chairman, president, and CEO, said deposit pricing pressure would probably continue after a halt to Fed rate increases. “There may be a period of time where we continue to see an increased cost of interest-bearing liabilities, and that’s an issue for the next months ahead,” he said.
At the $30.8 billion-asset Compass, of Birmingham, Ala., the margin expanded 10 basis points in the quarter, to 3.8%, in part because of Compass’ $464 million acquisition of TexasBank Holding Co. in late March.
There was another expansion price — Compass was among those in the Southeast that advertised more in the quarter to compete for deposits. Executives at SunTrust and the $116.3 billion-asset BB&T Corp. also said that marketing costs rose and that heightened competition in their markets was the main reason.
BB&T also became more competitive in deposit pricing and less dependent on borrowings. The Winston-Salem, N.C., company’s margin shrank 6 basis points from June 30, to 3.76%.
“We were able to fund our loan growth with client deposits,” said John A. Allison, BB&T’s chairman and chief executive. “There’s clearly more price competition in the marketplace and we are responding to that.”
The fragmented Midwest remains the most competitive deposit pricing market; Mr. Fitzsimmons said the region’s median margin fell by 7 basis points. Five Midwest regionals have the nation’s highest rates for interest-bearing deposits, according to data compiled by Banc of America Securities: Marshall & Ilsley Corp., Fifth Third Bancorp, Comerica Inc., KeyCorp, and National City Corp.
Greg Smith, the chief financial officer of the $54.4 billion-asset Marshall & Ilsley, said the market requires such pricing.
“As rates have risen, we’ve been positioned to be competitive on price and to regain deposit growth that we believe will be sustainable across the rate cycle,” Mr. Smith said on the Milwaukee company’s earnings call. Its margin fell 2 basis points compared with the first quarter, to 3.24%.
Not everyone in the region is eager to compete on price.
Thomas E. Hoaglin, the chairman, president, and CEO of the $36.3 billion-asset Huntington Bancshares Inc. in Columbus, Ohio, said its strategy is one of control.
“We could certainly show more growth if we weren’t more disciplined from a pricing standpoint,” he said. “We’ve just been really focused on what it takes to keep that margin in place.”
Huntington’s margin expanded by 2 basis points from June 30, to 3.34%. But executives said they had to increase marketing efforts to raise transaction and business banking accounts.
Mr. Fitzsimmons said regionals in the West had median margin compression of 7 basis points in the second quarter compared with the first. He said the battle for deposits hinges largely on the loan growth in the region.
David Moffett, the vice chairman and chief financial officer of U.S. Bancorp in Minneapolis, said on its earnings call that deposits continued to migrate toward CDs.
“This migration reflected the company’s deposit pricing decision for money market products in relation to other fixed-rate deposit products,” Mr. Moffett said. The margin at the $213.4 billion-asset U.S. Bancorp fell 12 basis points from the end of the first quarter, to 3.68%.
Some balk at aggressive deposit-gathering.
Zions Bancorp. of Salt Lake City took on $1.2 billion of Federal Home Loan bank borrowings in the second quarter to fund its loan growth. But executives are still reporting some pricing pressure — Zions’ margin shrank by 5 basis points from June 30, to 4.64%.
“Pricing on money market deposit accounts has become tougher,” said Doyle Arnold, the CFO at the $43.8 billion-asset Zions. It is unclear whether banking companies would “quickly back off” of higher pricing if the Fed start lowering rates, he said.
The median margin among regionals in the Northeast fell 5 basis points from the end of the first quarter, Mr. Fitzsimmons said.
William J. Ryan, the chairman and CEO of TD Banknorth Inc. in Portland, Maine, said that “undisciplined small savings banks” are advertising 7% rates for some CDs. Mr. Ryan said he told the $40.3 billion-asset company’s head of retail, in jest, that he ought to put TD Banknorth’s deposits in those banks.
“So we’re finding more extreme competition in New England than the mid-Atlantic, but not more competition,” Mr. Ryan said. TD Banknorth’s margin expanded 24 basis points from the end of the first quarter, to 4.07%, partly because of a balance-sheet restructuring.
