The deposit-pricing pressure that squeezed banks' profits through much of 2006 may be on the wane.
Analysts and bankers say deposit gathering is still a challenge, but some say the pressure to push rates higher on certificates of deposit, money market accounts, and interest-bearing checking accounts may have peaked in the third quarter. More recently the outlook has improved, they said.
"Deposit pricing, I do think, eased a bit in the fourth quarter," said Lawrence K. Fish, the chairman and chief executive of Citizens Financial Group Inc., the Providence, R.I., unit of the $1.5 trillion-asset Royal Bank of Scotland Group PLC. He was quick to add, however, "I couldn't say 'a lot.' "
Meanwhile, the decline in pricing among Citizens' competitors has yet to translate into "deposits returning" to his company, Mr. Fish said last week.
A recent survey by bank analysts at Citigroup Inc. found that 11 of 21 large banking companies had cut money-market deposit rates this quarter, though eight raised rates modestly. The survey, done in the last week of November, found money market rates were down an average of 3 basis points in this quarter from the third quarter.
"Interest checking rates were down slightly" from the third quarter, and "banks got less aggressive with CD promotions," according to the Citigroup report issued Dec. 15. Of 22 banks surveyed on CD promotions, 12 had cut rates and only three raised them.
Rick Barham, the president and CEO of Market Rates Insight in San Rafael, Calif., said Citigroup's findings are consistent with what his firm's research has found.
In an interview Wednesday, he said CD rates have declined an average of 4 basis points nationwide this quarter and the trend is widespread. Average CD rates are down 2 basis points in California, 3 in Illinois, 5 in Florida, and 6 in both Texas and New York, he said.
The Citigroup survey found average rates on money market and interest-bearing checking accounts are down this quarter, compared with the third quarter, in all regions except the Midwest. The average was down 6 basis points in the West, 4 in the South and Southeast, and 3 in the East. However, it was up 1 basis point in the Midwest.
Keith Horowitz, a Citigroup analyst, wrote, "We expect interest-bearing transaction deposit costs to be down just a couple basis points, and we continue to see NIMs [net interest margins] declining only 1 to 2 basis points" in the fourth quarter, compared with 6- to 7-basis-point declines in the prior two quarters.
The report concluded: "The cuts should not lead to a significant decline in deposit rates."
But just as some banks anticipated rate changes by the Federal Reserve Board on the way up, one banker said Tuesday, the industry may now be anticipating Fed moves downward.
"The Fed is pausing, and people are already thinking in the first quarter next year or second quarter, that they will ease," said Cor Broekhuyse, the chairman of Rabobank NA and regional head for the Americas at the $650 billion-asset Dutch parent company Rabobank Group. "So your deposit-pricing people are thinking to preempt that a little bit."
Deposit-pricing pressure mounted throughout the year's first half as the Federal Open Market Committee approved a series of quarter-point rate hikes. The last move, to 5.25% for federal funds, came in June.
The Fed's decision in August to leave rates unchanged meant some relief for many banking companies that had watched net interest margins shrink in part due to higher funding costs.
Washington Mutual Inc.'s third-quarter net income fell 9% from a year earlier, to $748 million, in part because of a drastic decline in its net interest margin. The $349 billion-asset Seattle thrift company said on Oct. 18 that its net interest margin of 2.53% was 20 basis points lower than a year earlier and down 12 basis points from the second quarter.
Wamu chairman and CEO Kerry Killinger said at an investor conference Dec. 13 that deposit pricing in the third quarter was "pretty aggressive." But in the fourth quarter, he said, Wamu experienced "a little bit less aggressive deposit competition."
However, Scott Custer, the chairman and CEO of RBC Centura Banks Inc. in Raleigh, a subsidiary of $479 billion-asset Royal Bank of Canada, sounded less certain than the others that rate pressure is easing.
"I've heard it," he said in an interview Tuesday; "I've heard people talk about" a letup in deposit-price hikes. "But I tell you, if you picked up the Raleigh newspaper today, I could show you five different ads that show you quite the contrary."
"On deposit pricing - especially in markets where there are lots of smaller community banks that have to rely on that CD-type funding for their core funding - rates are still inflated," he said. "I think in certain parts of the market there is more rationality maybe than there's been, but it is still very competitive."
Mr. Fish agreed with Mr. Custer that deposit gathering remains a challenge.
"The migration of deposits out of banks and into alternative financial assets is as big a problem as pricing. There's no growth in deposits, and on that there was no change in the fourth quarter," Mr. Fish said. "What you've got [in deposits] is a little less expensive, but what you've got continues to be not as much as we experienced in '02, '03, '04."
Joe Morford, an analyst at RBC Capital Markets Inc., said that for some banks "it definitely seems the pricing pressure is abating or moderating."
He said bankers have told him that deposit rates have crept lower in specific markets, including Sacramento and Las Vegas.
Fourth-quarter trends are a notable reversal from the third quarter and may help boost margins this quarter.
Deposit-pricing pressure intensified when the fed funds rate hit 5% in May. In the second and third quarters bankers said they felt intense deposit pricing pressure as customers moved cash out of low-yielding accounts.
"You were seeing preemptive rate hikes" late in the cycle, Mr. Morford said, as banks anticipated Fed rate hikes and tried to beat competitors' deposit-pricing moves.
"These banks were out saying, 'Look, the Fed is going to raise again, why don't we raise the rates ahead of that and try to bring in customers by offering a little better rate,' since that was going to be the market rate anyway. That made the competitive landscape a little more intense," he said.
Deposit rates should remain fairly stable into 2007, he said, "barring Fed rate moves or significant changes to the yield curve."
Though many expect the next Fed move to be a rate cut, Dallas Federal Reserve President Richard W. Fisher sent a different signal Dec. 19. "The risk of unacceptably high inflation still outweighs the risk of substandard economic growth," he said in a speech to a Dallas community group. Inflationary pressures are "at too high a level for party poopers like me who will have no choice but to advocate tightening monetary policy further if inflation does not ratchet downward."
