Business Customers Are Tired Of Being Bilked Of Billions; Demand Rate Increases On Their Bank Deposits

As we"re all well aware by now, once Trump was elected on November 8th the Fed suddenly decided it was no longer necessary to prop up asset prices in the United States with artificially low interest rates.  As such, they"ve embarked on their first rate-hiking spree since the last one ended just over a decade ago. 

Meanwhile, in light of the fact that the Fed has raised rates by 75bps over the past 6 months, we recently wondered aloud just how long the big banks could continue to stiff Americans out of interest payments on their deposits.  As the Wall Street Journal points out today, despite three Fed rate hikes over the past several months, the average rate paid on deposits at the 16 largest banks in the U.S. has risen a paltry 10 bps.

Meanwhile, with nearly $12 trillion held in deposit accounts at U.S. commercial banks, each 25bps of foregone interest is costing depositors about $30 billion a year, all of which is flowing straight to the bottom line of the large banks.

In the end, we concluded that the banks would continue to suppress deposit rates for as long as their customers continued to ignore the fact that they were getting shafted but that, over the long haul, math and greed would prevail and depositors would demand higher rates.

Alas, it seems as though the "long haul" that we predicted has arrived well ahead of schedule...at least for business customers anyway.  As the Wall Street Journal points out today, corporate customers are starting to demand higher rates on deposits and, for the most part, the large banks are acquiescing.

Consumers are giving banks a pass when it comes to shopping for higher interest rates on deposit accounts. Businesses, on the other hand, are becoming more demanding.

With short-term interest rates on the rise, corporate depositors are seeking bigger payouts for their deposits, and big banks have started capitulating.

The reason: Small rate increases are often worth just pennies to many consumers, but they can translate into meaningful dollars on large corporate deposits of millions or even billions of dollars.

And companies have greater leverage with banks since in many cases they also bring in lucrative investment banking and trading business.

“The jig is up,” said James Gilligan, assistant treasurer at Kansas City, Mo.-based power company Great Plains Energy Inc. He said many companies, including his, have negotiated better deposit pricing with banks where they also borrow. Treasurers who have the flexibility to move their money are also seeking out higher rates.

Of course, the reality is that banking institutions offer fairly commoditized products with minimal differentiation and barriers to switching, aside from the pure hassle, are not that extensive.  So while banking executives may tout their position of power in negotiating to keep deposit rates lower for longer, in the end they"ll be forced to take whatever rate the market demands...

“The way we approach pricing these days is, we defend our turf,” says Tayfun Tuzun, chief financial officer at Fifth Third Bancorp , the Cincinnati-based bank. Mr. Tuzun said U.S. banks are also being pressured by competition from overseas banks that want to build their deposits. Some are willing to pay 1.25% or 1.3%, he said, while a typical corporate deposit rate for a large account in the U.S. currently is about 0.9% to 1%.

More corporate customers say that day is now passing. “A year ago, it was not worth the time it takes to make a phone call” and push for a higher rate, said Jeff Glenzer, vice president at the Association for Financial Professionals, an industry group for corporate treasurers. “The higher the rate becomes, the more attractive it is to worry about where the money sits.”

Most banks are already awash in more deposits than they need, causing some analysts to predict they’ll be stingy on corporate deposit rates, especially with loan growth softening in recent months.

“We’ll use pricing to start relationships,” said Darren King, CFO of M&T Bank Corp. , based in Buffalo, N.Y. “But over time, relationships need to work for both us and the customer.”

And, then again, maybe Yellen will completely cave on rate hikes if equity markets ever decide to decline for more than 30 minutes at a time and this whole discussion will be moot.

How Long Will Banks Screw Their Customers On Deposit Rates...As Long As You Allow Them To

As we"re all well aware by now, once Trump was elected on November 8th the Fed suddenly decided it was no longer necessary to prop up asset prices in the United States with artificially low interest rates.  As such, they"ve embarked on their first rate-hiking spree since the last one ended just over a decade ago. 

Of course, equity investors have failed to realize so far that the party may be coming to an end as every debt-fueled asset bubble, from autos to residential mortgages, is about to experience the demand destruction that comes along with a tightening of credit.  That is, if Yellen and her fellow bankers can stay the course.  But that is all a story for another post. 

For now, in light of the fact that the Fed has raised rates by 75bps over the past 6 months, we"re wondering just how long the big banks can continue to stiff Americans out of interest payments on their deposits.

Take, for example, the following chart from Bank of America"s Q1 2017 earnings presentation.  Despite the Fed"s target rate increasing 50bps from the end of 1Q16 through the end of 1Q17, Bank of America actually slightly decreased the rate they paid on consumer deposits...which was basically nothing already.  At the same time, their net interest income has soared.

Which has understandably delighted bank shareholders...

...but it does raise the key question of just how long depositors will allow their banks to get away with this highway robbery.  Afterall, with nearly $12 trillion held in deposit at U.S. commercial banks, each 25bps of foregone interest is costing depositors about $30 billion a year, all of which is flowing straight to the bottom line of the large banks.

The answer, of course, is quite simple as the banks will continue to suppress deposit rates for as long as their customers continue to ignore the fact that they"re getting shafted.  And how long that will take is anyone"s guess. 

On the one hand, there are a lot more online banking options that pay attractive rates on deposits now compared to the previous rate hike cycle suggesting that customers have more options for moving their money around to find a better deal.  On the other hand, banking relationships can be somewhat sticky because people simply don"t want to deal with the hassle of having to move their accounts.  Per the Wall Street Journal: 

“Many bank management teams believe we could be one to two hikes away from an increase in retail” deposit rates, John McDonald, a bank analyst at Bernstein, wrote in a recent note. “At the same time however, we’ve never quite seen a cycle like this play out before, so it’s tough to know for sure.”

Banks have been dealing with interest-rate cycles and depositors for decades, but a number of factors, both psychological and technological, make this time of rising rates different. A decade of near-zero rates, more competition from online firms, less loyalty from customers and new capital rules, among other factors, are making preparations more difficult.

“We’ve never really seen this movie before,” Marianne Lake, chief financial officer of J.P.Morgan Chase & Co., told investors recently.

But while banks can rely on the "stickiness" of deposits in the near term, over the long haul, we suspect that math and greed will prevail...

A number of online-focused banks, like Ally Financial Inc. and Synchrony Financial , are able to pay higher rates because they are less encumbered by brick-and-mortar expenses. An even newer competitor, Goldman Sachs Group Inc., has been driving rates higher to draw deposits to its new consumer bank. It currently offers 1.2% interest on online savings accounts.

All those factors combined raise the prospect that when consumers do decide to move, banks may be forced to raise rates at a faster pace than investors might be expecting.

Nelson Bonilla is part of that threat. His savings account at Synchrony pays about 1.15% interest. But Mr. Bonilla, a software developer in San Francisco, is on the lookout for institutions that might pay more.

Though he has already moved his savings account twice in recent years, he’s open to being wooed away a third time. “I wouldn’t hesitate,” Mr. Bonilla says, “to switch again.”

And, then again, maybe Yellen will completely cave on rate hikes if equity markets ever decide to decline for more than 30 minutes at a time.