U.S. banks are preparing to slash interest payments on corporate deposits as the Federal Reserve's recent rate cuts take effect.
Following the Fed's decision in September to lower its benchmark rate by 50 basis points, the first reduction in over four years, U.S. financial institutions are focusing on corporate deposits as a key area to maintain profit margins amid declining interest levels, according to a report from the Financial Times.
Corporate Deposit Rates Come Under Pressure
In the wake of the Federal Reserve's rapid rate hikes through 2022 and early 2023, banks increased interest payments on deposits to retain customers.
As benchmark interest rates soared to 23-year highs, corporate depositors, in particular, saw rates on their accounts rise sharply with Fed policy, the FT reported. These accounts became a significant tool for banks to attract and retain capital, preventing businesses from shifting funds into higher-yielding alternatives like money market funds.
With the recent rate cuts and more expected in the coming months, U.S. banks are now focusing on reducing the costs associated with these corporate deposits.
Several industry executives have echoed this sentiment. Bruce Van Saun, CEO of Citizens Financial Group Inc.
This trend is likely to continue, with projections indicating that the Fed's rates could fall from 5% to around 3% by 2026.
Banks Leverage Flexibility Amid Weak Loan Demand
The environment of lower interest rates has also coincided with a downturn in loan demand.
While this has pressured banks' net interest income, it has provided more flexibility when it comes to adjusting deposit rates.
Jason Goldberg, a research analyst at Barclays, told the FT: "it's still very early in the cycle, but you certainly have started to see banks take action a little bit prior to this Fed cut in mid-September."
Small, Midsized Banks Eye Margin Protections
Mid-sized and smaller U.S. banks have been under significant pressure to raise the interest rates they offer on savings accounts in order to prevent customers from moving their money elsewhere.
This competition has been especially tough for regional banks, while larger institutions like JPMorgan Chase & Co.
Citizens Financial, which holds approximately $175 billion in deposits, is among the regional players employing sophisticated models to balance customer retention with deposit rate cuts.
Van Saun reportedly said the bank takes a "very, very scientific" approach to pricing deposits, ensuring that rates are high enough to keep corporate clients satisfied but not so high as to erode profitability.
Implications For Bank Stocks
Shares of major U.S. financial institutions, tracked by the Financial Select Sector SPDR Fund
Major banks like JPMorgan Chase & Co., Goldman Sachs Group Inc.
For these large institutions, the planned cuts in corporate deposit rates could further bolster their profit margins, or at the very least help them maintain profitability. Their scale and perceived safety make it unlikely that such moves will result in significant withdrawals, providing a strategic advantage.
In contrast, smaller and mid-sized banks, represented by the SPDR S&P Regional Banking ETF
With heightened competition in the sector, these banks are in a more precarious position - overly aggressive cuts could prompt corporate depositors to move their funds elsewhere. As a result, these institutions may face pressure on their profit margins to keep depositors satisfied.
A silver lining could exist: for regional banks: lower interest rates might stimulate loan demand, which could help offset the pressure on deposit funding costs by increasing lending volumes.
