- Bankers have flipped their outlook. Of 411 bankers polled in October by fintech firm IntraFi, 87% said they expect a moderate or significant increase in funding costs over the next 12 months, American Banker reported. Last fall, 80% of bankers polled expected funding costs to decrease.
- Costs are already rising. Asked to compare current funding costs with those of a year ago, 60% said they were moderately higher, 18% said they were the same and 20% said they were lower. In response to a question about higher-for-longer rates and bond-market volatility, 58% pointed to higher funding costs or pressure on net interest margin as the biggest potential impact, while about 17% expected no material impact.
- Deposit competition is heating up. Among respondents, 73% expect more competition for deposits over the next 12 months, up from 57% a year ago.
- Banks are feeling it in their results. Atlantic Union Bankshares said its third-quarter cost of funds rose seven basis points from the second quarter to 2.01%, while Hancock Whitney’s cost of funds rose about eight basis points to 1.53% and its cost of deposits rose to 1.55%, with the bank saying deposit costs could rise about that much again in the fourth quarter.
What Happened?
IntraFi’s quarterly Bank Executive Business Outlook Survey was conducted online over two weeks in early October, about two weeks after the Federal Reserve’s September rate hike, its first in three years. More than half of respondents were chief financial officers, nearly a quarter were CEOs and 14% were presidents. The Fed has since held rates steady, but the market broadly expects a hike in December, American Banker reported. A year ago, bankers expected the Fed to keep cutting; it cut twice more before pausing as the US and Israel attacked Iran, pushing up energy and other costs.
Why It Matters?
Funding costs are one of the biggest swing factors for bank earnings, and the survey shows the industry bracing for a squeeze on deposit pricing. IntraFi senior policy adviser Paul Weinstein called it “a massive swing,” driven by rising bond yields, inflation and the view that the Fed will keep raising rates. The effect will not be uniform: Atlantic Union said its margin could still expand as variable-rate loans reprice, and Hancock Whitney’s CFO said “overall we’ll benefit from rate increases.” Banks with more fixed-rate assets and rate-sensitive deposits face more pressure. Bankers are gloomier on the economy too, with just 16% expecting it to improve, down from 32% a year ago.
What’s Next?
Watch the Fed’s December meeting, where a hike would add to deposit costs, and fourth-quarter guidance on net interest margins from regional banks. Hancock Whitney has already flagged deposit costs rising about eight basis points again in the fourth quarter. Rising competition for deposits could also push more banks to lean on borrowings or higher-yielding deposit products.
Affected Tickers and Coins: KRE, KBE, AUB, HWC
Source: American Banker
