Bankers say the deposit cost pressures that have nagged at them this year are finally easing, but analysts warn they're not yet out of the woods.
Many banks have struggled this year as the Federal Reserve's rate hikes make depositors
If the Fed does cut rates, it's more likely to lower them just a bit than slash them, analysts say. That leaves plenty of room for depositors to notice their banks could be paying them more.
"The risk is still there," said Theresa Paiz Fredel, senior director at Fitch Ratings.
Higher rates have been good for banks by letting them charge more interest on loans, but the aggressive pace of Fed rate hikes also prompted depositors to ask for more compensation. The industry's profitability has fallen as banks' deposit costs continue rising.
More compression is likely next year, partly because depositors can turn to money market funds and other higher-yielding options if their banks don't pay enough, according to
The good news is that the "pressure is gradually abating" thanks to the Fed pausing its rate hikes, according to Manan Gosalia, an analyst at Morgan Stanley. The Fed last raised interest rates in July, taking a breather after raising rates to a 22-year high in a little over a year.
"We still expect a couple of additional quarters of pressure, albeit at a decelerating pace, as deposit costs typically continue to rise until the Fed cuts rates," Gosalia wrote in a note to clients.
At an industry conference last week, bank CEOs seemed cautiously optimistic that deposit costs are close to peaking.
"We're in a competitive marketplace, and there are a lot of dynamics at play," Bryan Jordan, CEO of the Memphis, Tennessee-based First Horizon Corp., said at Goldman Sachs' U.S. Financial Services Conference. "But it does feel like the deposit betas have sort of run their cycle."
PNC Financial Services Group CEO Bill Demchak said the exact peak isn't yet clear, but that "we're going to climb out of it and produce record levels of net interest income in 2025."
The outlook would be improved if the Fed indeed starts cutting rates next year, as many investors are now expecting. Even so, markets don't foresee a wholesale slashing of interest rates.
That would mean that interest rates are likely to remain at their highest levels since 2008, leaving open the possibility that more depositors will want to be paid more.
Among commercial clients, larger corporations with sophisticated finance teams made sure to ask for higher rates early in the rate-hike cycle. Middle-market companies also caught on.
But smaller businesses are still getting paid relatively little for their cash, according to a recent report from the consulting firm Curinos.
Business checking accounts pay just 0.41% on average, compared with 2.9% for middle-market clients and 3.75% for large corporations. Businesses' savings accounts pay significantly more at 2.48%, but they still lag the 3.59% rate that middle-market companies get and the 4.65% that large corporates get paid, Curinos found.
For those who are still getting paid less, bankers are "probably going to sit very quietly and hope they don't pick up the phone" and ask for more compensation, said Peter Serene, managing director at Curinos.
"There's still a backlog that hasn't repriced," Serene said.
On the consumer end, banks have successfully pulled in deposits through offering special rates on certificates of deposit, but the strategy hasn't come cheap. Some 53% of the CDs that banks have added pay at least 5% interest, according to Curinos data.
Some older CDs on bank balance sheets pay less than that. But the problem is those CDs are set to run out in the next few months, giving consumers with lower-paying CDs an option to get paid more once their current contract expires.
One positive development for banks is that the market for CDs is becoming a little bit less competitive. Some are starting to cut CD rates now that the odds of Fed rate cuts are rising, according to Ken Tumin of DepositAccounts.com.
Five institutions were offering 1-year CDs nationwide that paid at least 5.8% as of Oct. 25, but that number dropped to just one as of Dec. 6, Tumin
Others, however, are still catching up as CD rates settle into a new normal.
Synchrony Financial raised its 14-month CD rate to 5.65% recently, from 5.25%, and Capital One Financial and American Express boosted the rates on CDs of about a year to 5.25%, from 5% earlier, according to DepositAccounts.com.
Modest rate cuts may become more widespread
"I don't see any big cuts until the Fed moves," Tumin said.
