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US banks are considering aggressive cuts to interest payments for corporate depositors as they seek to protect their profit margins after the Federal Reserve cut benchmark lending rates.
Since 2022, lenders have been offering better rates to savers as the Fed raised benchmark interest rates to 23-year highs and they sought to ensure customers did not move their cash to another bank or into money market funds.
Corporate bank clients were some of the biggest beneficiaries, demanding and receiving payments on their deposits that rose in lockstep with the Fed’s benchmark rates.
Following the first interest rate cut in more than four years last month, some banks have identified corporate accounts as the ones most subject to changes in savings rates.
“Corporate rates are moving [down] faster than expected and faster than consumer deposit rates,” said Scott Hildenbrand, chief balance sheet strategist at Piper Sandler.
The 50 basis point cut by the Fed is expected to be the first in a series of reductions. Policymakers indicated in projections that rates could eventually come down from around 5 per cent to around 3 per cent by 2026.
“You can price down [deposits] faster, let’s say in your corporate books because they were demanding every penny on the way up,” Bruce Van Saun, chief executive of Rhode Island-based regional lender Citizens Financial, which has about $175bn in deposits, told the Financial Times.
Tim Spence, CEO of Cincinnati, Ohio-based Fifth Third Bank, told the FT that “corporate clients got the greatest benefit out of rising rates, and therefore it’s only logical that their rates would fall”.
This view was echoed by Michael Santomassimo, finance chief at Wells Fargo, the third-biggest bank in the US by deposits.
“We’re seeing exactly what we thought we would see on the most interest rate-sensitive deposits,” Santomassimo said in a presentation for Wells’ third-quarter results last week. “So on the commercial side, as rates started to come down, the betas are exactly what we thought and are pretty high for those deposits. So that’s working.”
Deposit betas measure how much of the change in interest rate policy banks pass on to customers.
Weak demand for loans has hurt interest income. But it has given banks more flexibility when it comes to lowering what they pay depositors, because they do not need the deposits immediately to fund new lending.
“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 and certainly additional actions after the Fed cut,” said Jason Goldberg, research analyst at Barclays. “We’re in the, I would say, early innings of this down beta cycle.”
Bank deposits are their primary source of funding. The pressure to increase savings rates in order to keep customers has been particularly acute for mid-sized and smaller lenders in the US. Larger institutions like JPMorgan Chase and Bank of America have benefited from their perceived safety and national branch networks.
Around 32 per cent of JPMorgan’s $1.9tn in US deposits do not earn any interest whereas Citizens pays no interest on around one-fifth of its deposits, resulting in a larger pool of cheaper funding for JPMorgan.
Van Saun said Citizens took a “very, very scientific” approach to measuring the best way to price deposits to ensure they remain with the bank.
“We have all kinds of behavioural models across all the different deposit products that we have,” he said. “You’re trying to basically predict what are the rates that customers need to feel OK and leave their money in the bank but you’re not paying significantly above that.”
