Rutger Van Faassen: As expected, the FOMC maintained the Federal Funds rate at a target range of 5.25% to 5.5% at its November meeting, remaining unchanged from the previous September pause. Here today to discuss the implications for the banking industry is Adam Stockton, who’s managing director of retail deposits and lending here at Curinos. Adam, let’s start with the deposit side. With the Fed holding steady on their short-term rates, what does that mean for deposit rates being paid by banking institutions?
Adam Stockton: Thanks, Rutger, and thanks for having me. So, in the short run, what it means is we’re not likely to see huge changes overall in the market from a deposit-rate perspective when we look at the market as an aggregate, but that doesn’t mean that individual banks won’t be moving their rates around sometimes quite a bit. There are always changing needs in terms of “How many more deposits am I trying to get in the door?” There are differences between different institutions in terms of how they think about internal funding pressures, FTP, that mean they might be tilting more towards CDs or more towards savings. We’re just starting the first wave of really significant CD maturities that are happening across the industry from the high-rate CDs that were put on in the fourth quarter last year. So all those pressures are things that banks need to respond to as they think about their deposit rate. Ultimately, from a consumer perspective, that’ll mean that if the best rates out in the market are in the low to mid-5%, call it today, we’re not likely to see a lot of 6% rates coming out, and you’re likely to still be able to find deposit rates in the low to mid-5%. It might not be at the bank you were using today. It might not be in the product that you have today. You’re going to have to look around for it, and so the stabilization at the top end of the market doesn’t mean individual rates won’t move around. And from a bank perspective, banks are trying to manage profitability and dealing with continued churn from back book and lower rate into higher-rate products. We’ll see some rates moving around just to manage the profitability side as well.
Looking ahead to December’s final meeting of the year, Fed Funds futures contracts suggest a 20% chance of a rate hike, so what are your feelings about whether or not we’re at the cycle’s peak, and did Chair Powell say anything at the press conference that caught your ear regarding future moves?
As I’ve told many clients over the years, if I had a crystal ball where I knew what the Fed was going to do, then I would be retired and sitting on a beach somewhere with a drink that has a tiny little umbrella in it. So, it could go either direction. I think overall what stood out to me the most was a lot of reporters trying to nail Chair Powell down and him by and large refusing to be nailed down. Is the Fed leaning towards tightening as a posture? What’s the bias? And the message from the Fed has been quite consistent, which is our number one priority is making sure that inflation is under control, and then after that, we’re thinking about everything else. From my perspective, it remains imperative that banks think about different forward scenarios. Is it possible we get another increase in December? Absolutely. Is it possible we hold flat all the way through 2024? Probably less likely, but absolutely a possibility. Is it possible that we get decreases most likely in the second half of next year? Absolutely a possibility, but none of those are a sure thing. As we’ve all seen, the data can change pretty quickly and the Fed will act in response to that.
Yeah. I thought it was also interesting to see how he talked about the dot plot as that is something that’s happening today and tomorrow something can change and it means completely nothing.
Absolutely. I mean, it’s the best tool that we have to get a quantitative sense of what the Fed is thinking. It nails them down and takes them out of the zone that they’re often in of … wishy-washy is unkind, but language that is intentionally vague to make sure that they’re keeping their options open. It gives a real sense of what the FOMC committee members are thinking in terms of where things are going to go. But as you point out, it’s stale now and it will continue to be stale until the next one’s released in December. So it gives us a good idea, but we saw a significant movement between a number of the dot plots earlier this year, and only time will tell whether that’s true for the next one.
Now, interest rates for new mortgages have been above 7% since August, which is the highest in over two decades, and for the first time in nearly as long, Treasury yields are in the 5% range. Does this continued pause and tightening mean anything for the lending market?
Demand for lending continues to be difficult. As rates have been above 7% for mortgages, as you note, we have a decrease in demand for new mortgages. We have consumers really thinking about whether they should move, upsize, downsize, even things like relocating for a new job. Does that make sense? The bar is higher in many cases if housing costs are going to increase by 20% or 30% or more on a monthly basis at least for some period of time. With that said, there are certainly some bright spots. Home equity is starting to come back. We’ve seen increased demand for adjustable rate mortgages. Some amount of movement and migration and home buying is unavoidable, albeit less of consumers taking up mortgages at these rates. If we do see some easing at the back half of next year, things will start to look better heading into ’25, but there’s still pockets of opportunity and the smarter banks are looking for those opportunities to grow their balance sheet and squeeze out the basis points of margin that they can.
Thinking about this holistically, how does this overall impact the banking profitability?
I wish I had better news and wasn’t all doom and gloom on our last question here, but it’s going to be tough moving forward. Just because deposit rates are largely holding flat, I alluded to it in passing earlier. As we’ve talked about before, we continue to see interest expense rise even in a plateau environment. There are customers who are coming up for maturity for a 3% CD, many of whom are going to go into a 5% CD from that 3% CD. We still see migration out of checking and low-rate savings into money markets, high-yield savings and CDs. So there’s continued pressure upward on deposit yields, but at the same time, asset yields have largely flattened out. The combination of those two means NIM is compressing. There are also some pressures on fee income. As we think about with loan originations down, particularly on the mortgage side, that is traditionally a meaningful source of fee income for banks that’s also under pressure. I wish I could say something other than it’s going to be a challenging period of time here as the Fed is in a plateau. What we’ve seen historically is that, in challenging times, there’s real opportunities for the winners and losers to separate out. Really actively, scientifically, tactically managing on both sides of the balance sheet is absolutely critical. Thinking about cost reductions, but in a way that doesn’t damage the franchise. One of the challenges that we’ve often seen in the past is overreaction to these kinds of tough environments where, “Hey, I need to take an ax to my branch net.” Well, if your branch network is where your zero-cost checking deposits are located, you got to be really careful with that. Despite the tough environment, making sure that you’re responding to not just the short-term pressures, but keeping an eye on the long-term growth of the business. This, too, shall pass. There are opportunities both if the Fed increases again and also, as we will eventually move into another easing cycle, for some of these near-term profit pressures to abate. So I think that the number one thing in my mind is make sure you’re not putting yourself behind the eight ball when that eventually does happen.
Thank you, Adam, for joining us.