Highest Rates on CDs Now Offered By Healthy Firms, Credit Card Banks

A year ago, troubled banks and thrifts were the undisputed leaders in interest rates paid on certificates of deposit.

Now, a handful of credit card banks and other healthy institutions have moved to the top of the yield list.

The changing of the guard is partly the result of the government seizure of troubled institutions. In addition, some healthy banks have jumped into the pricing game to garner media attention and appear on various listings.

Credit Card Banks

Furthermore, the big credit card banks are driving to diversify their funding. With no branch networks and little overhead, many of these institutions can easily tap the retail deposit market with mass mailings.

In recent weeks, MBNA America Corp. has consistently appeared on the list of top rates. The credit card company was spun off by MNC Financial Inc. early this year.

"Clearly, they've been the leader," said Hugo Ottolenghi, editor of One Hundred Highest Yields, a publication of Financial Rates Inc., which also publishes Bank Rate Monitor.

"But it's part of a trend. One year ago, most of the leaders were distressed banks. This year, they are healthy banking companies and credit card banks."

A glance at last week's ranking from Bank Rate Monitor shows that First Federal Bank of Wilmington, Del., offered the best yields on six-month certificates, LaSalle National Bank in Chicago on one-year terms, MBNA on 2 1/2-year deposits, and Dartmouth Bank on five-year CDs.

Except for Dartmouth, these institutions received the top rating of financial health awarded by Veribanc of Wakefield, Mass. Dartmouth, a subsidiary of the insolvent New Hampshire Dartmouth Bancorp, earned the lowest, zero on a scale of zero to three.

When Ailing Firms Led

By comparison, the Aug. 3, 1990, list was dominated by zero-rated companies desperately bidding up rates to obtain much needed funds. The roster included Citytrust Bancorp, a Bridgeport, Conn., bank that is insolvent, and Maine Savings Bank, which was seized in January and sold to Fleet/Norstar Financial Group Inc.

The so-called New England premium on CDs began to disappear late last year as regulators moved aggressively to take over ailing institutions in the region. When regulators step in, they usually move quickly to lower rates and ease pressure on other institutions in the market.

Having disposed of many ailing institutions, federal regulators have helped push down deposit rates across the country. In addition, the Federal Reserve has depressed key lending rates, lowering the cost of funds for banks and thrifts.

In June 1990, the top rates on six-month and one-year time deposits climbed well over 8%. The top rates have since fallen more than a percentage point, to 6.55% for six months and 6.98% for one year, according to Bank Rate Monitor.

Among last week's leaders, LaSalle noted that it is offering attractive rates partly because of the accompanying publicity. The company's high CD rate has been frequently listed in the financial press and in venues like Money magazine, said a bank spokeswoman. Through this free advertising, LaSalle can cross-sell products, she said.

At the same time, several institutions specializing in credit card operations have grown rapidly and are pressing to find more funding in the retail market.

"It's the bank card executive's dream to be 100% self-funding," said Donald Auriemma of Auriemma Consulting in Garden City, N.Y., whose clients includes MBNA.

"They have higher profitability and higher chargeoffs than [traditional] banks: They have to be more aggressive," said Dennis Shea, an analyst for Morgan Stanley & Co.

Along with MBNA, Citibank (South Dakota); First Deposit National Bank, Tilton, N.H.; and Colonial National Bank, Wilmington, Del., are credit card banks frequently cropping up on the list of top CD rates.

MBNA came on like gangbusters in the CD market because it had an instant need for short-and long-term funding after being spun off from ailing MNC of Baltimore in January. Its primary source of funding remains the securitization of credit card receivables.

But since becoming an independent company, it has increasingly turned to CDs. Its rates were particularly attractive in the second quarter.

"We've been more aggressive in the last six months," said Bruce Hammonds, vice chairman and head of retail deposits. "We've had to increase the level of deposits as an alternative source of funding."

MBNA began to overtake other companies on the CD listings in May and June, elbowing aside longtime rival Citibank (South Dakota), according to Mr. Ottolenghi. In the third week of July. MBNA led in most CD categories.

Citibank (South Dakota) is tapping the national deposit market through Citicorp Select Investments, a group of investment products sold to existing and potential customers through mailings and newspaper ads.

A Citicorp spokeswoman acknowledged that the company can nudge up the price of CDs above that of traditional bank competitors because of low overhead.

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