Smaller banks may soon find themselves having to fight harder to gather and keep deposits.
Many financial institutions have been awash with deposits since the financial crisis, but the possibility of rising interest rates will force more bankers to consider how to manage their funding costs. While most banks have yet to see a meaningful rise in deposit rates, it is wise for executives to go ahead and start thinking about the issue, industry observers said.
"There are pockets where funding costs have maybe gone up because economic growth is occurring at a quicker pace," said Michael Carson, a senior director at consulting firm Vitex. "There's no question deposits will increase in price over time, especially if the Federal Reserve raises its target rate for Fed funds."
Fed policy will largely dictate the pace of deposit repricing, industry observers said. Many believe that the Fed will move slowly, which should benefit bankers as they manage their balance sheets.
A survey by Promontory Interfinancial Network, conducted in June, found that one in five bank executives had seen a rise in funding costs. And two-thirds of the survey's 269 respondents pointed to retail deposits as the primary catalyst for future increases. Retail deposits make up roughly 90% of domestic deposits at banks with less than $1 billion of assets.
Park Sterling in Charlotte, N.C., is among the banks tinkering with higher deposit rates. The company has been offering a 1.36% rate for certain money market accounts in Richmond, Va., a market it entered earlier this year. Customers have to sign up for a checking account and electronic statements to quality for the rate. (Very few banks are offering money market account rates above 1%.)
Park Sterling decided to offer a higher-than-average rate as part of an effort to bring in more deposits without having to add more branches, James Cherry, the $2.4 billion-asset company's chief executive, said in a recent interview. "Our core cost of funds still remains low," he added.
Other bankers said they have yet to witness a meaningful increase in deposit pricing.
"There are still a lot of deposits out there," said Hal Tovin, chief operating officer at BSB Bancorp in Belmont, Mass. "Even though the stock market has been robust, people are now especially wary, and that will keep deposits in the bank."
Larger banks could start to aggressively target retail deposits because those liabilities are treated more favorably under new liquidity coverage ratio rules, said Darien Bates, a market research expert at Promontory.
"I certainly think there's a concern that community banks will have to fight for their deposits," Bates said. "I don't think it will be impossible for them to handle. They seem to be really optimistic about this."
The biggest banks already have an advantage over smaller banks on deposit pricing because of convenience factors that include extensive ATM networks and an ability to offer a wide range of products and services, said Judd Caplain, advisory industry leader for banking and diversified financials at KPMG.
Still, concerns about a massive shift in deposits could be overblown, some industry observers said.
Customers maybe even more reluctant now than they were just a few years ago to move banks because technology, including direct deposit and depositing checks remotely, makes it more inconvenient to switch, Caplain said.
"I don't think deposits will jump around that much as customers are more electronically tied to their banks," Caplain said. "It's not impossible to move accounts, but it is pretty convenient to stay put. I already know how to use the app on my iPhone, so I have to decide if I really feel like taking the time to switch banks and learn a new one."
Banks are becoming more sophisticated in their approach to deposit pricing. Institutions are using more modeling to gauge whether the cost of paying a higher rate would be offset by an ability to sell more products per customer, Caplain said.
BSB's deposits increased by almost 17% during the first six months of this year, compared to a 10% jump in loans. The $1.6 billion-asset company offers a competitive savings account rate, which requires customers to have a checking account at its bank. BSB has also been recruiting deposits from municipalities, which typically involve larger accounts, and the legal profession.
"There are always the rate shoppers, but that's not who you really want because there will always be someone with a better rate," Tovin said. "We try to focus on the relationship so the customer feels like they're getting a competitive rate and … a good product."