The last time CDs were this hot, bankers went to the mall to buy them.
Kidding aside, the other CDs — certificates of deposit — were all the rage last quarter as banks competed with each other to retain deposits and locked in funding from customers for several months. The renewed popularity of CDs isn't great for banks because it's expensive to offer CDs when the Federal Reserve has raised interest rates to a 22-year high.
But the CD push did help many banks rebuild their deposit bases, reversing the declines some suffered after this year's bank failures prompted jitters among depositors.
Those depositors are back, but their return is coming at a cost and weighing on profitability. Depositors who stuck around are also no longer content earning little on their savings, so they're sticking their cash in banks' higher-yielding CDs.
The hottest competition among banks is on shorter-term CDs that last a year, give or take a few months. While that strategy is costing banks right now, it locks up funding for them for some time — and gives them the option to issue cheaper CDs soon if interest rates fall.
"It's very competitive now," said Vincent Calabrese, chief financial officer at the $44.8 billion-asset F.N.B. Corporation in Pittsburgh. "But if rates start to come down midyear, second half of next year, we have an opportunity to reprice those lower. So that's exactly the strategy."
To draw in deposits, many banks ran CD specials offering rates of 4.5% or upwards, a far higher rate than they offered months ago. Those that weren't able to achieve enough "organic" growth bought CD customers in the brokered deposit market, where rates are even more expensive.
The result was banks' interest expenses rose sharply during the second quarter, and their profit margins got squeezed. The median net interest margin at the top 20 banks fell from 3.14% during the first quarter to 2.91% in the second quarter, according to RBC Capital Markets analyst Gerard Cassidy.
Some bankers said in recent earnings calls they've seen some of that pressure ease off. But Ken Tumin, the founder of the data-tracking firm DepositAccounts, said the CD market hasn't been this competitive since 2006 or 2007 and that more pressure may yet emerge.
A couple of small credit unions are now floating CD specials offering 6% rates, he said, and others are likely to follow.
Even the country's biggest banks haven't been able to avoid the competition. Bank of America felt some of those competitive pressures this quarter as some financial institutions "pushed prices higher," Chief Financial Officer Alastair Borthwick told analysts last month. Still, he noted the $3.1 trillion-asset bank's deposits far exceed its loans and that it has "not yet felt the need to chase deposits with rate."
Bank of America's featured CDs of seven and 13 months offer a 4.5% annual percentage yield. JPMorgan Chase offers similar promotional rates for six-month CDs, while Wells Fargo offers a five-month special CD with a 4.5% annual percentage yield and an 11-month one with a 4.75% APY.
Promotional rates carry some risks for consumers because they may not notice that they'll roll onto a lower-rate standard CD once their special rates expire, said Tumin, of DepositAccounts.
For now, however, those seeking CDs of several months or a year can easily earn up to 4.5%, or even 5%. That is close to the roughly 5.4% yield currently available for one-year U.S. Treasury securities, Tumin noted.
Banks have been unwilling to offer high interest rates on multiyear CDs, driven by the fear that the Fed could cut rates next year and make expensive multiyear CDs look like a bad bet.
That cautious outlook lines up with the sentiment from bond markets, where the U.S. Treasury yield curve is inverted.
Yields on shorter-term Treasury securities are significantly higher than longer-term interest rates, suggesting that investors see a recession ahead that could prompt Fed rate cuts.
Most of the banks' CDs carry "pretty short" terms, giving them the ability to roll customers into cheaper CDs if rates fall next year, said Chris McGratty, head of U.S. bank research at Keefe, Bruyette & Woods.
"They're not taking multiyear bets. They're taking six-, nine-, 12-month bets," McGratty said. "So it's coming at a cost, but if we are in an environment where the rate environment improves, they go lower next year, then some of that pressure can get rolled down."
