Yield-Hungry Consumers Pose Challenge

As consumer bankers head into 1992, some might be excused for thinking they've entered a time warp.

Yields on one-year certificates of deposit are the lowest they've been in more than two decades; passbook savings accounts are beginning to dip under 4%, and home mortgages are being offered at rates not seen for 17 years.

"These are uncharted waters in modern retail banking," said David W. Mooney, who heads the consumer banking franchise of Texas Commerce Bancshares, the Houston-based subsidiary of Chemical Banking Corp.

Though low rates should help build demand for consumer loans, the other side of the interest rate coin - deposit gathering - is troubling some bankers.

With the average one-year CD returning less than 5%, yield-hungry consumers are increasingly answering the siren call of brokerage houses, mutual funds companies, and other bank rivals whose uninsured investment products are taking on new luster. They may be more speculative, but they apparently appeal to small investors who are getting so little from traditional bank products.

Consumers Shun CDs

In the first 10 months of the year, the dollar amount of small-denomination CDs at banks and thrifts fell 7%. Assets at mutual funds jumped 16% in the same period.

Among consumers making the switch are retirees, bankers said.

"The rates have come down so low that it's been a big blow for older people who rely on interest income," said William Cooper, chief executive of TCF Financial Corp., a major thrift company based in Minneapolis. "They've been moving money out of the banking system into annuities, Treasury securities, mutual funds, and the like."

Baby Boomers Also Defecting

And the shift is not only in the older population. Edward Furash, a Washington-based consultant, said that sophisticated baby boomers with an orientation toward investment are also making the move out of banks.

"You've got a large group of investors and savers who are so used to high yields that they think they have a God-given right to a minimum of 8%," Mr. Furash said. "They're moving to anything regardless of risk."

Some bankers, to be sure, don't care very much about the runoff of deposits since they have little opportunity to invest them."

Mutual Fund Products

But bankers are fearful of losing relationships with consumers, leading them to redouble their efforts to sell mutual funds and other nondeposit investments within the legal limits allowed them.

Citibank, for example, has been trumpeting "5 Attractive Alternatives to CDs" in full-page newspaper advertisements for several months as part of a campaign pushing fixed-income funds and other "conservative" investment products that are "alive and well at Citibank."

The effort, at times, makes for some odd juxtapositions, mixing old bank marketing approaches with the new.

The Citi ad recently ran in a suburban New York City newspaper opposite a second full-page ad stressing in big boldface letters that its money market account is "FDIC Insured (and) 100% Liquid."

New products are being promoted by small banks, as well. The $700 million-asset First Interstate BankSystem of Montana - which is not connected with California's large First Interstate Bancorp - is pushing annuities.

Avoiding Rate Quotes

"We've avoided any rate-oriented advertising," said Neil Klusmann, director of marketing at the Billings-based company.

Others are decorating their CDs with new bells and whistles. San Francisco-based Wells Fargo & Co., for instance, is offering a one-year "bump-up" CD with a yield that will rise if market rates go up.

Banks are less concerned with promoting conventional checking accounts and passbook savings accounts, which are proving more stable than CDs.

In fact, these deposit accounts have been growing without much prodding. Ironically, they are no longer the source-of-fund bargains that banks once coveted, because deposit account rates tend to reprice slowly, bankers said.

In recent years, for example, rates on passbook accounts have been as much as 4.75 percentage points below the federal funds rate, a key benchmark of funding costs. Nowadays passbook rates are often higher than the funds rate, which recently fell to 4%.

Downplaying Low Yields

Analysts said bankers are afraid to push their conventional account rates lower, however, out of fear of prompting more depositor defections.

"You're kind of bumping against the limit of how far down you can push consumer rates without the consumer saying, |Enough,'" said Nancy Bush, an analyst at Brown Brothers Harriman & Co.

On the brighter side, low interest rates are spurring intense demand for mortgage refinancings - a trend that many lenders expect to continue into 1992. Heavey refinancings have led to the mortgage industry's busiest year since 1986.

But there is little demand for loans to buy homes or big-ticket items. On the whole, that means the negatives of low interest rates outweigh the positives.

A Squeeze on Profits

"Most retail financial institutions are greater gatherers of deposits than they are lenders to consumers, so in the aggregate the low-rate environment probably causes some squeeze on profitability," said William Bowen, managing vice president at First Manhattan Consulting Group in New York.

Some consultants also predict that the rate changes may cause a long-term change in investor attitudes - another bad sign for bankers.

"I think consumers are simply changing their investment behavior," said Eugene Podsiadlo, senior vice president in charge of marketing at Warburg Pincus Counsellors Inc., a New York-based mutual funds concern. "They're not simply going to let their CDs roll over for 20 years like their grandparents might have."

Bankers, in turn, express increasing frustration over the constraints that Depression-era banking laws impose on their ability to offer alternative investment products. Congress' refusal to change those laws in this year's banking bill only exacerbated their feelings.

"The issue is our ability to provide a breadth of products," said Mitchell Ratliff, group marketing manager for liability products at Chase Manhattan Bank.

Chase's Alternatives

The nation's fourth-largest bank company, he said, has worked hard in the past two years to arm itself with mutual funds, annuites, and unit investment trusts - and to train employees to sell the products.

As a result, Mr. Ratliff asserted, Chase has retained more than half its former CD customers who bought alternative products from the bank.

Because of regulatory restrictions, most banks offer mutual funds and other investments in partnership with outside companies. Liberty Securities of Boston, one such company, says its bank customers have increased 25% this year.

Consultants encourage bankers to continue offering new products, no matter how difficult the effort may seem.

At the very least, "you know where the money is parked and can get it back later," said Mr. Furash.

Mr Bowen of First Manhattan goes further. "The idea is to manage disintermediation, as opposed to just letting it happen,: he said. "Bankers should be able to earn as much money providing investment support for the average person as they would earn by putting the same person into CDs."

Some bankers say their best weapons in the low-rate environment, however, are the relationship accounts that flourished in the mid-1980s. These offer special pricing and service to customers who use a variety of credit and savings products.

They argue that the overall value the account, including such intangibles as convenience, is more important to the consumer than the pricing of any one product.

Texas Commerce, for example, claims that its customers and the deposits they are making are on the increase because of this approach.

"We've attracted a customer base that's value oriented instead of purely rate oriented," Mr. Mooney said.

But he acknowledged that a big test of customer loyalty could lie ahead.

"At some level of rates, there's always the worry that the historically rate-insensitive customers will reach their threshold of tolerance," he said.

Ellen Braitman and Yvette D. Kantrow contributed to this article.

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