Small Banks Brace for Deposit Wars as Interest Rates Rise
17 December 2018 - 3:29AM
Dow Jones News
By Rachel Louise Ensign and Allison Prang
Rising interest rates were supposed to help banks. They are
hurting many of them instead.
Three years after the Federal Reserve began raising rates from
near zero, bank customers are starting to demand more interest on
their deposits, particularly at small and regional U.S. banks. Many
of these same banks ramped up lending after the financial crisis by
adding long-term, low-rate loans. Now, as they pay out more to
depositors, the rates they are earning on loans are barely
moving.
Pinched banks can be found across the country. They include
34-branch Banc of California Inc., where interest costs rose 68%
over the last year as it paid up to attract depositors; Southern
National Bancorp of Virginia Inc., which is now paying 2.25%
interest on certain checking accounts while national lenders
continue to pay effectively 0%; and New York Community Bancorp
Inc., whose deposit costs are rising faster than the yields on its
loans for city apartment buildings.
Overall, profit margins from lending are still rising at banks
of all sizes. But at many small banks, the metric has started to go
in the opposite direction. Net interest margin, which is a key
profit metric, fell at nearly half of a sample of small U.S. banks
in the third quarter from a year earlier, according to an analysis
from investment bank FIG Partners LLC.
It is the latest sign of a growing divide between large and
small financial institutions. Big banks have spent billions of
dollars developing mobile apps and other technology to attract and
keep customers without paying higher rates. They also added loans
to their balance sheets that benefit when rates go up.
Smaller banks face a more immediate need to raise deposit rates.
These banks use more of their deposits to make loans, meaning a
loss of customers could jeopardize their ability to cheaply fund
that lending. Their depositors often skew toward business accounts
and consumers with certificates of deposit, two groups that tend to
keep a close eye on rates.
The pressure to raise rates to retain deposits has become much
more profound in the last six months or so, said Scott Siefers, an
analyst at Sandler O'Neill.
When rates were near zero, many small banks used plentiful
interest-free customer deposits to grow loans aggressively, often
in the area of commercial real estate. In the process, many of
these banks tacked on a record number of loans that carried low,
fixed rates for long periods. The Fed moves have thrown a wrench
into that approach.
Pinnacle Financial Partners Inc. more than quadrupled its assets
to $24 billion over the last eight years and went on a hiring
spree, enticing bankers with the promise of less bureaucracy than
bigger institutions.
But in the last year, the Nashville-based bank's profit margins
from lending have started to shrink due to higher deposit costs.
Its shares have given back all of their gains since Donald Trump's
2016 election sparked a broad rally in bank stocks.
Pinnacle is trying to reverse the slide. It is hiring bankers
who specialize in gathering deposits and, though it has eschewed
advertisements in the past, launched a campaign to tout a
money-market account paying 1.69%.
"These customer wars are new," said Christopher Marinac,
director of research at FIG Partners. "I'm not sure it gets better
unless the Fed changes gears."
Smaller banks still have above-average net interest margins, but
the gap is narrowing, according to the Federal Deposit Insurance
Corp. That is because bigger banks continue to benefit from the Fed
raises as they tend to have more floating-rate loans such as
consumer credit-card debt and corporate loans.
Banks of all sizes are grappling with slowing loan growth, while
a flattening yield curve threatens to crimp the margins they earn
from borrowing short term and lending longer term. Over the last
three months, the KBW Nasdaq Regional Banking index is down 20%,
compared with 18% for the big-bank KBW Nasdaq Bank index.
Over the last four years, New Jersey-based Investors Bancorp
nearly doubled its book of loans for apartment buildings to $8
billion. Some 62% of the bank's loans are for commercial real
estate, largely in New York and New Jersey.
Rates aren't budging on many of those loans. Commercial
real-estate loans typically have fixed-rate periods from three to
10 years, a span that often got longer in recent years due to
fierce competition for borrowers.
Investors Bank's average loan yield barely rose over the last
year, from 4.10% to 4.20%. Meanwhile, the rate the bank paid on
interest-bearing deposits increased from 0.90% to 1.39% in the
third quarter from a year earlier. The bank recently hired Keefe,
Bruyette & Woods to look for a potential buyer, The Wall Street
Journal reported last month.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com and
Allison Prang at allison.prang@wsj.com
(END) Dow Jones Newswires
December 16, 2018 11:14 ET (16:14 GMT)
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