The Wall Street Journal wrote a piece entitled, "Which Banks to Own When Savers Get Fed Up." Subtitled, "2018 will be the year that banks finally start paying decent returns to savers, but some will have to pay more than others," the article discusses the likelihood of various banks raising rates for savers in the coming year. It says, "Savings accounts, which have paid out almost nothing for the past decade, could get more interesting in 2018 as yields rise and investors scramble for the higher returns. That could be bad news for certain banks. Savings account yields haven't risen much since the Federal Reserve started raising interest rates. As the Fed keeps tightening in 2018, more banks will raise deposit rates and savers will respond by rushing to the banks that pay the most."
The Journal update tells us, "That is what happened in the last tightening cycle in the mid-2000s -- banks moved slowly at first, gradually accelerating as rates moved higher. This time banks might have to be more aggressive because it is easier than ever for savers to move cash electronically to higher yielding competitors like Capital One and American Express. Analysts at Keefe, Bruyette and Woods estimate that banks will pass along 34% of the rise in the Fed's target rate to savers in 2018, up from 15% in 2017. As a result, most banks will still be net beneficiaries of higher rates. But the impact will be uneven."
It adds, "For the first time in years, investors in bank stocks will have to look hard at the liability side of bank balance sheets. How much banks need to pay for deposits will determine banks' profitability and growth rates.... Already, banks with more ordinary consumer deposits have raised yields more slowly, compared with banks with lots of deposits from businesses or wealth management clients, which tend to chase yields. Among the biggest banks, Bank of America has the strongest consumer franchise with 72% of deposits coming from consumers, according to analysts at Goldman Sachs. Among regional lenders, Regions Financial and PNC Financial are among the most consumer-centric."
Finally, the Journal writes, "Fast-growing banks may also need to pay up for deposits to continue their loan growth. The biggest banks have the advantage here because the government has restricted their lending so they are sitting on excess deposits. In a recent note, analysts at Goldman Sachs put all these factors together into a composite score judging how resilient a bank is to rising rates. Among major national banks the clear winner was Bank of America. Among regional lenders, some of the standouts were Regions Financial, BB&T and PNC Financial. These banks should be among the best to own as rates keep marching higher."
The FDIC's "Weekly National Rates and Rate Caps" report shows the average non-jumbo (< $100K) national Savings rate at 0.06%, while the average non-jumbo Money Market Account is 0.09%. For Jumbo Savings and Deposits the averages are 0.06% and 0.15%, respectively. The average money market funds, on the other hand, is currently yielding 0.94% (Crane Money Fund Average) or 1.11% (Crane 100 MF Index).
For more news on pressure on bank deposit rates, see also our Nov. 1, 2017 "Link of the Day," "WSJ (Again) on Banks Raising Rates, our Oct. 25 Link of the Day, "Banks Pay Up on Deposits Says WSJ," and our Oct. 12, 2017 News, "Wells Bumps Up Brokerage Sweep Rates, Raises FDIC Insurance Coverage." See also our Brokerage Sweep Intelligence, which shows the average brokerage sweep account rate rising from 0.07% to 0.11% for FDIC insured accounts at the $100K level over the past month.
In other news, "Federated Investors' Deborah Cunningham writes in her "2018 Outlook: Month in Cash," about the likelihood of 2% yields in 2018. She tells us, "This time of the year, the talk is always about resolutions. For cash managers in 2018, the better word is "resolute". We think this year will continue to be a slow and steady march into 2% land, for both government rates and inflation. That's a sunny path to be sure, but there's potential for distractions. Looking unwaveringly past those as the year progresses will be important for money managers for setting investment strategy and in managing daily operations."
Cunningham writes, "The Federal Reserve is, of course, at the center of it all. Its December Federal Open Market Committee (FOMC) meeting went as expected, resulting in a rate increase (to a range of 1.25-1.50%) and projections for three more in 2018. We think the moves will be front-loaded -- happening in March, June and September -- leaving open the potential for yet another one of those Fed year-end hikes. But whenever they come, three rate increases would put the short end of the London interbank offered rate (Libor) in a range of 2-2.25%."
Federated's piece continues, "Yes, you read that correctly. The cash markets could very well have a two handle this year! In fact, we already are seeing 12-month trades in that range. If our expectations of three moves rings true, 9-month trades could soon hit that 2% level, then 6-month trades, then 3-month trades, etc. But as we all know, the Fed also can disrupt even its own plans, or at the very least create bumps in the road, and there will be opportunities this year."
Finally, it adds, "Another Fed issue is the number of empty seats on its board of governors…. But neither of these two points is likely to be a major issue, and we don’t expect much volatility as the year progresses, or much change at all from the environment of the latter half of 2017. The economy is gaining momentum, Libor remains supportive, floating-rate securities should still be attractive and prime funds industry-wide likely will see inflows because they tend to respond faster to rising rates than deposit products. So stay the course as it twists and turns, because it also likely will be rising."
