Deposit costs will decide how much of the Fed's September hike banks get to keep

A rate hike pays a bank on its loans and charges it on its deposits, and the two run on different clocks. A variable-rate loan tied to the policy rate picks up the full 25 basis points ^[5] when it resets. A deposit costs more only when the bank chooses, or is pushed, to pay more. On a dollar of variable-rate lending funded by a dollar of deposits, every basis point handed to the depositor comes out of that 25 ^[16]. At JPMorganChase, the largest U.S. bank with $5 trillion of assets ^[3], one basis point across the whole balance sheet is about $500 million a year ^[15].

The analysts quoted by American Banker think the pushing started before the Fed moved. Bank of America Securities, in a note previewing regional banks, wrote: "We expect deposit costs to disappoint." ^[8] Its analysts said "competition was already applying upward pressure" from July to September ^[9]. Peter Serene, a managing director at Curinos, said deposit-acquisition costs were rising even before the hike and could force banks to raise deposit rates faster than normal ^[10]. "The growth in deposits has been really strong, especially for mid-cap banks," said Stephen Scouten, a Piper Sandler analyst. "It's just a question of, 'How much did you have to pay to get it?'" ^[7]

The quarter can land three ways. Scouten named two of them: "I do think generally the expectation is that funding costs will go higher. The question is: Is that mitigated by fixed-rate asset repricing, or is this the quarter where deposit costs will overwhelm" the gain on variable-rate loans ^[11]. In the first case, fixed-rate assets reprice fast enough to cover funding costs and margin holds. In the second, deposits reprice faster and margin and income both slip. The third is a deliberate trade. Some analysts frame the debate as whether banks should give up some net interest margin growth to grow net interest income ^[12]. A bank that pays up keeps its balances and earns more dollars on a thinner spread. A bank that refuses keeps the spread and lets the deposits go to whoever pays.

I'd expect the third. Loan demand is rising ^[13] and deposit growth has been strong ^[7], so banks with loans to fund have a reason to buy deposits. The industry broadly believes margins have peaked ^[1], and a lower margin on Tuesday is the expected print. Margin on its own tells little. The figure to read is net interest income growth set against the change in deposit costs. The view is wrong if JPMorganChase reports flat deposit costs and a rising margin, since that would mean fixed-rate repricing won and the pay-up warnings were early. If margin and net interest income both fall, the Bank of America Securities case holds.

Tuesday is a first read, and an indirect one. The sharpest cost warnings concern regional banks, in the Bank of America Securities note ^[8], and midsize lenders, which Scouten covers in the Southeast and Southwest ^[14]. Seven of the largest banks report over two days ^[17], and none of them is a regional. Scouten also asked whether a higher-rate environment will constrain loan growth ^[1]. Slower loan growth would leave banks with less reason to pay up for deposits at all.