June 26, 2017 / 1:16 PM / a month ago

Fitch: U.S. Bank Deposit Competition to Remain Benign

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(The following statement was released by the rating agency) NEW YORK, June 26 (Fitch) Most U.S. banks' should be able to keep deposit costs at very low levels through 2017, even after two Fed rate hikes since December and another one expected this year, says Fitch Ratings. Most banks will likely wait for loan growth to pick up before making any meaningful change to offered rates. While online banking may prove an exception, deposit rate competition should still be contained in this segment. Deposit costs have moved little despite the Fed Funds target rate being raised a cumulative 75bps to 1.25% since December 2016. Substantial excess deposits in the system and low loan demand have likely been the key factors keeping deposit betas - the share of a fed rate hike passed on to depositors - low for a protracted period. <iframe allowfullscreen src="//e.infogram.com/us_bank_deposit_costs_change?src=embed" title="US Bank Deposit Costs Change" width="550" height="715" scrolling="no" frameborder="0"> Fitch estimated excess deposits of $1.35 trillion at end-2016. Recent Federal Reserve data is also showing deposit growth exceeding loan growth for the first time since mid-2014 while the loans/deposit ratio remains low relative to the historic average. This has resulted in the average median cost of interest-bearing deposits for traditional commercial banks in the U.S. rising by less than 10bps over the past two years. The median cost of interest bearing deposits for traditional commercial banks ranged from 30bps to just under 50bps at end-1Q17 depending on asset size. <iframe allowfullscreen src="//e.infogram.com/us_loans_to_deposit_ratio?src=embed" title="US Loans to Deposit Ratio" width="550" height="646" scrolling="no" frameborder="0"> Fitch believes that a rise in deposit betas and absolute deposit costs is inevitable despite the recent trends. We maintain our view that U.S. interest rates will normalize faster than consensus expectations and that the latest rate hike on June 14 underscores that the Fed is on-track for an additional 25bps hike by end-2017 with continued steady increases in 2018 and 2019. Rising deposit costs, in the context of broader rate normalization, should not have a major credit or ratings impact. Rising interest rates should generally benefit bank earnings through rate-sensitive assets and as they could contribute to higher earning asset growth, though this will depend on individual banks' balance sheets. It is also important to note that sustained rate hikes do not always contribute to net interest margin (NIM) expansion if the yield curve flattens. NIMs compressed during the last rate hiking cycle from 2004-2006 and Fitch notes that the yield curve has flattened since December 2016 as long-end yields have steadily fallen while short-end rates have risen with the policy rate hikes. In mid-June 2016, the yield curve was the flattest it has been in two years with the spread between three-month T-bills and ten-year Treasuries at just 114bps. U.S. banks have not experienced a sustained rate hiking cycle since 2004-2006 and changing market dynamics since then raise questions as to how the sector will react. New online players and shifts in consumer awareness of retail banking options could affect how banks react to monetary tightening with regard to deposit pricing. Competition within the internet banking space, including companies such as Ally Financial, Discover Financial Services (DFS), Synchrony Financial, CIT Group and American Express, could be much stronger as those banks vie for deposits to support loan growth initiatives. Evidence of such increasing competition was apparent after the most recent Fed rate hike as DFS raised its online savings account rate to 1.1% from 1.0% while Goldman Sachs, which recently made its foray into consumer deposit gathering online increased its rate to 1.2% from 1.05%. Contact: Bain Rumohr, CFA Director, Financial Institutions + 1 312 368-3153 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Justin Patrie, CFA Senior Analyst, Fitch Wire +1 646 582-4964 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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