Are we paying too much for deposits?
This entry was posted on 1/9/2008 3:33 PM and is filed under Deposits,Checking Accounts,Management.
January 8, 2007 A quarterly survey released last week by
Citigroup Inc. noted that while a few banks have followed the Fed's lead and
trimmed rates, most have been offering deposit promotions that are well above
the federal-funds target rate of 4.25%.
Why are banks still scrambling for deposits?
Because loan demand remains strong.
Banks fund loans with deposits, typically a less costly source of funds
than borrowing.
Banks are already earning less on loans, contributing to a narrowing in net
interest margin, a key measure of profitability. Net interest margins reflect earnings
made on the difference between rates paid to depositors and rates charged to
borrowers.
The industry average for net interest margin for the third-quarter 2007
stood at 3.78%, according to SNL Financial, a Charlottesville,
VA, research firm. The margin now stands at
the lowest level since 1991. In early
2006, the industry average was 4%.
In a report issued Monday, Bank of America Corp. estimates that the industry
will likely see fourth-quarter net interest margins drop by 0.05 to 0.15
percentage point.
The squeeze on the margin may be felt the most in small banks, which may
derive a substantial amount of their profits from interest income, which can
account for up to 80% of total profits.
Marketers need to contribute to bottom-line income by focusing on increasing
share of customer wallet. Free checking,
without excellent cross-selling capabilities, should be de-emphasized. With pressure to increase net interest
margins, rates will be less effective as a means to attract new business. Convincing checking customers to accept
monthly fee-based accounts will remain a key challenge.
