Rising interest rates pose a serious and growing danger to the low-cost accounts that banks have long taken for granted as "core deposits," says an industry analyst who has studied the issue.
Consumers may not tolerate the low returns they are receiving on these accounts for much longer, cautioned George M. Salem of Prudential Securities Inc., New York.
Destabilization of this important funding base for the banks could not only damage earnings but also inhibit the consolidation momentum of the industry, he warned.
Core deposits at banks being bought now command premiums from buyers. If buyers come to regard them as costly to keep, however, the deposits could be discounted instead. Dealmaking could falter as a result, Mr. Salem said.
"This is a very heavy message but a timely one, because rates are in the process of climbing steadily right now," he said. "The magnetic pulling power that dould suck the money out of these 2.5% accounts is growing."
Cupping a long spell of bearishness in the credit markets. the yield on the much-watched 30year Treasury "long bond" this week topped 8% for the first time since early 1992.
Other industry observers agree that confront problem in the important area of core deposits. "Without any doubt the banks are under pressure to step up to the plate and pay higher rates," said Frank J. Barkocy of Advest Inc. "Particularly with loan demand out-them, the banks need a growing base. of core deposits."
But Federal Reserve data disclose that bank savings deposits, including money market deposit accounts, have been slowly shrinking this year as rates have risen elsewhere.
In fact, Mr. Salem says, the trend is longer-term. Total bank savings and consumer certificates of deposit have barely grown since yearend 1987, remaining just under $2 trillion.
This illustrates a clear loss of financial market share by banks when the growth of the economy is taken into account, he said.
While not predicting a crisis, Mr. Salem said banks now face a costly effort to prevent further undermining of their deposit base.
"A moment arrives when the depositor finally wakes up," he said. "Maybe a brother-in-law or somebody else says, 'Listen, I know how you can triple your money without any more risk.'
"In fact," Mr. Salem said, "all they have to do is go out on the yield curve a little bit. One-year Treasury bills are yielding about 6.2%. Where's the risk in that?"
To assess how easily their core funds might shift, the Prudential analyst surveyed large banks about the size of accounts that hold core deposits.
He found that 91% of bank
money market deposits are in accounts over $10,000, 74% are in accounts containing over $25,000, and more than half, 52%, are in accounts containing $50,0000 or more.
Even in the more traditional savings accounts. almost 25% of balances is in accounts above $50,000 and over 40% is in accounts large than $25,000.
With balances so large, any significant fund shift would be materially important for earnings, said Mr. Salem. who wondered how many bank stock investors know "that so-called core deposits are in such big pieces."
Rates for consumer deposits at banks have fallen seriously behind other interest rates, lagging much more than in past rate cycles, the analyst noted.
Money market rates at banks haven risen "a paltry" 18 basis points since Dec. 31. versus 145 basis points for Donohue's money funds index. he said.