November 29, 2017 / 2:35 PM / a year ago

Fitch Scenario: What Happens to US Banks if Retail Deposit Rates Rise?

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Shock Scenarios: U.S. Bank Deposits (Rise in Retail Bank Deposit Rates Would Dampen Bank Profitability) here NEW YORK, November 29 (Fitch) Interest expenses for U.S. commercial banks could rise significantly, reducing profitability and net interest margins, if forced to compete with online banks on retail deposit rates, according to Fitch Ratings' latest hypothetical shock scenario report. Large U.S. commercial banks currently offer historically low rates to retail depositors despite several Fed Funds rate hikes since December 2015. By contrast, deposit rates offered by online banks are much more competitive, and have begun to rise with market rates. As of 3Q17, U.S. depository institutions offered 7bp in interest on retail accounts of less than $100,000 on average --much lower than the 118bps offered for the same accounts by online banks, according to FDIC disclosures. Currently, the loan to deposit ratio for all banks is 79%, much below the long-term average of 90%, limiting the need for banks to offer more competitive rates. Fitch tested two hypothetical scenarios to illustrate the impact that rising deposit rates could have. These scenarios contemplate a rise in retail deposit rates at large commercial banks strictly due to competitive pressure from online banks while assuming no change in market rates or asset yields. Importantly, the shock scenarios considered in the report differ greatly from Fitch's current base and stress case expectations and are not intended to call into question the assumptions underpinning Fitch's existing credit ratings or outlooks. Hypothetical Scenario 1: A rate of 75 bps (68 bp rate increase) on retail deposits would increase total interest expenses for large U.S. commercial banks to $7.6 billion compared to the $2.6 billion reported in 3Q17. This would decrease pre-tax income by $4.9 billion (11%). Hypothetical Scenario 2: A rate of 118 bps (111 bp rate increase) on retail deposits would increase total interest expenses for large U.S. commercial banks to $10.7 billion. This would decrease pre-tax income by $8.0 billion (17%). "While Fitch doesn't anticipate a significant rise in retail savings deposit rates at large U.S. commercial banks in the near term, these hypothetical scenarios illustrate the importance of this low cost funding source to bank profitability. Competitive pressure from online banks could raise the cost of these historically cheap deposits and hurt margins," said Jonathan Boise, Associate Director, Macro Credit Research. In addition, there are a number of other factors that could affect large bank profitability in the face of competitive pressure from online banks. They include the ability of large banks to mitigate the threat of deposit migration by leveraging their own competitive advantages like physical branch locations, brand recognition and their diversified businesses to offer other products and services to retail customers. Fitch anticipates that all banks are likely to see some increase in deposit betas -- the share of Fed rate hikes passed on to depositors -- regardless of the scenarios considered. Fitch believes the Fed is on track to raise rates in December. "The reality is that rated U.S. banks are mainly asset sensitive, so in a rising rate environment asset repricing would offset increases in deposit pricing betas and still boost net interest income," says Christopher Wolfe, Managing Director, Financial Institutions. The full report, "Shock Scenarios: U.S. Bank Deposits - Competition for Deposits Could Hurt Profitability," is available at Contact: Jonathan Boise Associate Director +1-212-908-0622 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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