Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, August 13, 1995 TAG: 9508110078
SECTION: BUSINESS PAGE: D1 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Long
And those already depressingly low rates are being driven down even further as the Federal Reserve Board tries to give the economy a kick by lowering the cost of borrowing - and, in tandem, the return on savings. Since Feb. 1, rates on one-year certificates have fallen by a sharp 11 percent to 5.12 percent, according to Bank Rate Monitor.
But there still is some competition in the marketplace likely to affect rates. It's the old law of supply and demand: If banks want your money to meet the demand for lending, they will bid up the ante a bit seeking to outdo competitors in attracting more deposits.
Unfortunately for savers, however, money has been a glut in the banking market for the last few years. Banks have had more deposits than they have had a demand for loans. The result is a lack of competition that has kept low interest rates even lower.
Now the American Banker, the industry newspaper, thinks it has spotted a reversal of the trend.
The trade paper noted the dollar value of consumer certificates of deposit grew in June at an annual rate of only 6.24 percent. That compares to the high in February of 40.9 percent.
This slippage, the newspaper said, diminishes a cheap source of funding that many banks use for consumer and commercial loans.
"Should the economy rev up and stimulate higher loan demand," the trade publication speculated, "some banks might artificially prop up CD rates to keep the money flowing in."
It predicted a return to competition for deposits by the end of this year or early next year.
Couple this with the recent quarterly financial reports from banks, all stating that they are enjoying a resurgence in loan demand.
The bad news is a poll of bank executives in the Roanoke Valley failed to turn up a single opinion that the tide is turning in favor of savers. In Roanoke, at least, deposits are holding up nicely, and banks have enough money on hand to more than meet the needs of borrowers.
Loans have been up significantly in the last year, said Robert C. Lawson Jr., president of Crestar Bank's regional operations.
And Crestar has "seen a lot of runoff" from deposits into mutual funds. Many of the departing depositors had never before invested in anything but bank CDs. But that runoff has slowed, Lawson said.
Once bank deposits drop to a certain level, he explained, what remains are the so-called core deposits. This is money that will remain in insured bank accounts regardless of the pushes and pulls of the marketplace.
Withers Burress, regional executive officer for Signet Bank - agreeing that Roanoke is bucking the the projected trend that banks will soon begin competing for deposits - said, "I haven't seen that here.
At Signet at least, the pressure for deposits has dropped even as the demand for traditional loans has risen, he said.
Burress said the bank formerly had trouble finding enough deposits to fuel its credit card business, the fastest growing segment of the lending market. But after Signet earlier this year spun off Capital One as a credit card bank, the need for deposits dropped off.
Burress, too, said many holders of maturing CDs have switched to mutual funds during the last two years as the certificates have remained mired at 3 to 4 percent. He said Signet's own mutual funds have averaged growth of $100 million a year over the last three years.
Robert Helms, vice chairman of First Union National Bank of Virginia, said there is a national trend in a decline in sales of certificates of deposit. The same is true in Western Virginia, he said.
That was coupled with a strong demand for loans during the first half of the year, although that demand has dropped off in the last month or so as it does most summers.
Yield-hungry investors are switching into mutual funds, he said. First Union's own Evergreen Funds have grown to $9.3 billion because of that trend.
A decade ago, he said, banks had no alternatives to offer depositors during times of low interest rates. Now, Helms said, "it's nice to be able to offer investors an option."
NBC Bank has lowered its savings rates, said James Beckner, senior vice president, but deposits and loans have remained in a good balance with each other so banks have money to lend. He predicted that rates will remain steady throughout the third quarter unless the Federal Reserve Board cuts interest rates again.
Banks earn their profit on the margin between what they pay out in interest on savings and what they take in for interest on borrowings, Beckner pointed out. They will keep this margin as wide as possible in the face of two factors: competition from other banks and the need to maintain customer relationships.
That, he said, is "the same reason Kroger runs specials on pork chops."
Banks have nothing to invest in now except loans, Beckner said, and "right now everyone is scrambling to put loans on the books. It's a game, I tell you, it's a game."
Valley Bank just opened in April, meaning it has had too short a time to track trends. But President Guy W. Byrd Jr. said he's seeing good growth in deposits. He said he's pleased with the mix between so-called demand deposits - checking accounts - and stable deposits, such as certificates of deposits.
Loan demand, he said, has been "quite strong. We're surprised at the interest we've seen in loans."
Loans and deposits seem to be in balance, Byrd said. "So far, so good."
Douglas Waters, regional executive officer for NationsBank, said CD rates "are probably more of an animal of the money markets" than they are of competition.
The banks are seeing loan growth, Waters said, but not enough of a demand to bid up the rates on deposits - nor so soft as to drive them even lower.
Monty Plymale, president of the Southwestern Region of Central Fidelity Bank, said deposits and loans right now are "in a very comfortable range."
Central Fidelity has plenty of funds on hand in deposits to meet the demand for borrowing, he said.
"This is an excellent time for consumers to obtain a loan," Plymale said.
And if lower rates and a surplus of deposits are good for potential borrowers, the times are correspondingly less favorable for savers.
by CNB