Several banks raised their prime rates after an increase in interest rates by the Federal Reserve on Dec 16. JPMorgan Chase & Co.’s JPM plan to increase deposit rates for some of its largest clients next month, however, will give it the first-mover advantage. The news was first reported by the Wall Street Journal.
The rise in deposit rates will primarily be for some institutional clients and the size of the increases are expected to differ. Moreover, the increase will be applicable to “operating” deposits, which are less likely to be withdrawn in a crisis. The hike, however, is not anticipated to affect deposits of retail clients.
Banks favor operating deposits more than excess or “nonoperational” deposits, which are deemed riskier. The banks have been making efforts to reduce nonoperational deposits due to new regulations that necessitate more capital to cushion riskier deposits such as noninsured balances held by hedge funds. JPMorgan lowered such deposits by over $150 billion in 2015.
Banks and other non-banking financial institutions like insurance companies, asset managers and brokerage firms tend to benefit handsomely from surging interest rates. For banks, borrowers taking up money have to pay higher interest rates under such circumstances, which in turn elevates income.
The interest rates hike, though at a slower pace, will ease some pressure on net interest margin (NIM) – a key source of banks’ earnings. Also, banks will earn more from the money that they need to keep at the Fed compared with almost no income from this source in a near-zero rate environment that has prevailed since the last financial meltdown. Moreover, as a rising interest rate depicts a healthier version of an economy’s growth, there will be lesser non-performing assets for the banks.
A rise in prime rate without an increase in deposit rate indicates the current strategy of other major banks like Bank of America Corporation BAC, Citigroup Inc. C and Wells Fargo & Company WFC to capitalize on the raised rates to ease margin compression. However, JPMorgan’s early move of raising deposit rates will surely earn some brownie points for the banking behemoth.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).
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