How Long Will Banks Screw Their Customers On Deposit Rates…As Long As You Allow Them To

As we’re all well aware by now, once Trump was elected on November 8th the Fed suddenly decided it was no longer necessary to prop up asset prices in the United States with artificially low interest rates.  As such, they’ve embarked on their first rate-hiking spree since the last one ended just over a decade ago. 

Of course, equity investors have failed to realize so far that the party may be coming to an end as every debt-fueled asset bubble, from autos to residential mortgages, is about to experience the demand destruction that comes along with a tightening of credit.  That is, if Yellen and her fellow bankers can stay the course.  But that is all a story for another post. 

For now, in light of the fact that the Fed has raised rates by 75bps over the past 6 months, we’re wondering just how long the big banks can continue to stiff Americans out of interest payments on their deposits.

Take, for example, the following chart from Bank of America’s Q1 2017 earnings presentation.  Despite the Fed’s target rate increasing 50bps from the end of 1Q16 through the end of 1Q17, Bank of America actually slightly decreased the rate they paid on consumer deposits…which was basically nothing already.  At the same time, their net interest income has soared.

Which has understandably delighted bank shareholders…

…but it does raise the key question of just how long depositors will allow their banks to get away with this highway robbery.  Afterall, with nearly $12 trillion held in deposit at U.S. commercial banks, each 25bps of foregone interest is costing depositors about $30 billion a year, all of which is flowing straight to the bottom line of the large banks.

The answer, of course, is quite simple as the banks will continue to suppress deposit rates for as long as their customers continue to ignore the fact that they’re getting shafted.  And how long that will take is anyone’s guess. 

On the one hand, there are a lot more online banking options that pay attractive rates on deposits now compared to the previous rate hike cycle suggesting that customers have more options for moving their money around to find a better deal.  On the other hand, banking relationships can be somewhat sticky because people simply don’t want to deal with the hassle of having to move their accounts.  Per the Wall Street Journal: 

“Many bank management teams believe we could be one to two hikes away from an increase in retail” deposit rates, John McDonald, a bank analyst at Bernstein, wrote in a recent note. “At the same time however, we’ve never quite seen a cycle like this play out before, so it’s tough to know for sure.”

Banks have been dealing with interest-rate cycles and depositors for decades, but a number of factors, both psychological and technological, make this time of rising rates different. A decade of near-zero rates, more competition from online firms, less loyalty from customers and new capital rules, among other factors, are making preparations more difficult.

“We’ve never really seen this movie before,” Marianne Lake, chief financial officer of J.P.Morgan Chase & Co., told investors recently.

But while banks can rely on the ‘stickiness’ of deposits in the near term, over the long haul, we suspect that math and greed will prevail…

A number of online-focused banks, like Ally Financial Inc. and Synchrony Financial , are able to pay higher rates because they are less encumbered by brick-and-mortar expenses. An even newer competitor, Goldman Sachs Group Inc., has been driving rates higher to draw deposits to its new consumer bank. It currently offers 1.2% interest on online savings accounts.

All those factors combined raise the prospect that when consumers do decide to move, banks may be forced to raise rates at a faster pace than investors might be expecting.

Nelson Bonilla is part of that threat. His savings account at Synchrony pays about 1.15% interest. But Mr. Bonilla, a software developer in San Francisco, is on the lookout for institutions that might pay more.

Though he has already moved his savings account twice in recent years, he’s open to being wooed away a third time. “I wouldn’t hesitate,” Mr. Bonilla says, “to switch again.”

And, then again, maybe Yellen will completely cave on rate hikes if equity markets ever decide to decline for more than 30 minutes at a time.