A month after trying to lead the banking industry with a cut in the prime rate, First Fidelity Bancorp. relented Monday, raising the interest rate on loans to its best corporate customers to 6%, from 5.5%.
The increase put New Jersey-based First Fidelity in line with the rest of the industry.
"I was kind of waiting to see when they would get around to it," said Felice Gelman, an analyst at Dillon Read & Co.
Out on a Limb
First Fidelity cut its prime to 5.5% Oct. 1, apparently anticipating a cut in the Federal Reserve's discount rate and eager for the marketing edge that comes with being the first to cut rates to customers.
But a discount rate cut never materialized, and. the state's largest banking company was left out on a limb.
Indeed, many economists now say that the next move in short-term rates will be up, not down.
"They probably looked and said, |Why should we give up 50 basis points ... with no possibility of rates coming down," said Lawrence I. Cohn, an analyst at PaineWebber Inc.
Many Loans Reprice with the Prime
Although being the first to cut the prime can win good will among customers, it can also cut into profits, because the interest rate on many loans floats with the prime.
When loan demand is strong, lower profits-from reduced interest rates can be made up by winning additional loans from competitors. But when loan demand is weak, as it is today, earnings are squeezed.
Analysts say that generating good will among customers who are not in the mood to borrow is useful only in the short term.
Still, First Fidelity said the cut would have "negligible" impact on fourth-quarter profits. Analysts said that is because the company also cut deposit interest when it cut the prime.
The company said it was cutting deposit rates because they were higher than competitors'. It is not raising deposit rates in tandem with its increase in the prime.