About a year after banks first started contemplating deposit price increases, competition for funding is heating up and the shift in the interest rate environment has been far sharper than anything the industry has experienced in decades.

At the beginning of 2022, expectations were set against the relatively sedate precedents established in the most recent tightening cycles, which were characterized by gradual and shallow increases in interest rates and still serve as benchmarks for what might happen now. As late as the end of the first quarter of 2022, rates across the Treasury yield curve, which fundamentally reflect expectations for average short-term rates over different time horizons, were all below 2.6%. But the Federal Reserve raised its overnight target from nearly zero at the start of the year to a range of 4.25% to 4.5% in December, with policymakers projecting a range of 4.9% to 5.6% by the end of 2023.

Big banks, including Citizens Financial Group Inc., Huntington Bancshares Inc. and M&T Bank Corp., have dialed up projections for ultimate deposit price increases in recent months as the ground has shifted, according to an S&P Global Market Intelligence analysis of guidance and performance so far. Other banks say how the current cycle will unfold relative to the last one remains uncertain. But essentially all expect price increases to accelerate from modest levels to date and catch up with underlying interest rates as customers move money to chase higher yields.

"Reprice lags are real," Marianne Lake, co-CEO of Consumer and Community Banking at JPMorgan Chase & Co., said at a conference in December. "The [net interest income] benefit is real, but it is somewhat transitional because we are continuing to expect and model that both migration and reprice will happen."

Worse than last time

Banks' guidance for deposit costs frequently centers on projections for betas, or the change in deposit costs as a percentage of the change in underlying interest rates. Combined with factors like loan betas — asset yields tend to be quicker to move — deposit betas are a key input in determining when net interest margins might peak, and hence the earnings expectations that help drive stock prices.

"Market participants are starting to realize that deposits are perhaps the biggest near-term challenge for the bank space, with industry betas being poised to lift at meaningful levels in the next quarter or two," Hovde analysts said in a Dec. 9 note summarizing meetings with institutional investors.

Banks like First Republic Bank, Huntington and Regions Financial Corp. have been explicit that their deposit betas might be worse than they were in the last cycle.

"We think it's reasonable to assume that betas ultimately are higher because history shows us that it's upward-sloping with respect to rates," Regions Treasurer M. Deron Smithy said at a conference in December. "So as you push to higher rates, betas push higher."

Numerical beta guidance given by some other banks is also higher than full-cycle betas for interest-bearing deposits calculated by S&P Global Market Intelligence from the third quarter of 2015 to the fourth quarter of 2018. Fifth Third Bancorp, for example, said it ultimately expects a cumulative beta of about 40% if the Fed lifts its policy rate to 5%, which compares with its cumulative interest-bearing beta of 32.6% last time as calculated by S&P Global Market Intelligence.

Still, other banks have maintained that it's too early to say what cumulative betas will be this time. JPMorgan Chase's Lake called deposit pricing a "wildcard" in December. Bank of America Corp. said its deposit levels are stabilizing after a drop in the third quarter. If customers "were going to move the money, they would have moved it now," Chairman and CEO Brian Moynihan said in December.

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Money in motion

Deposit betas have already started to pick up, though they remained low overall through the third quarter. Across a group of 15 large banks, median interest expense as a percentage of total deposits increased 5 basis points sequentially in the second quarter compared to an increase of 65 basis points in the average fed funds rate, for a median beta of 8.3%. In the third quarter, the median sequential beta was 15.7%.

The median cumulative beta for the group so far, or the change in deposit costs from the fourth quarter of 2021 — before the Fed started hiking — through the third quarter of this year as a percentage of the change in the average fed funds rate over the same time was 13.5%. That compares with a median 21.7% for the last full-hiking cycle. Cumulative betas tend to mount over time as more money "wakes up" and shifts into accounts offering competitive rates.

Many banks focus on betas for interest-bearing deposits only, where the median cumulative for the group was 20.0% through the third quarter, compared with 29.6% for the full-hiking cycle last time.

Cumulative betas at some banks have been exceedingly low, much better than their performance last cycle. At Wells Fargo & Co., with a cumulative interest-bearing beta of just 9.1% through the third quarter, executives have said they were forced to turn away rate-sensitive wholesale inflows during the pandemic surge because of the bank's regulatory asset cap, so it is dealing with less price pressure now. KeyCorp, with a cumulative interest-bearing beta of 9.0% so far, has given guidance that its full-cycle beta will ultimately climb to just above 30%, about in-line with the cumulative beta calculated by S&P Global Market Intelligence for the last cycle.

Relative performance among banks depends on factors like portfolio composition, with funds held by corporations and wealthy clients tending to be more price-sensitive than retail money.

The quality of portfolios and how they interact with unique circumstances does change over time, however. Lining up the 15 banks by cumulative total deposit betas so far during the current cycle, just six remained within one place of their rank in the last cycle.

SVB Financial Group's performance deteriorated from a first-place cumulative total deposit beta of 3.7% last time to a 13th-place 23.5% so far this cycle. The bank has experienced deposit outflows from operating accounts among its venture capital-backed clients as they hold back on raising new money after a crash in valuations and burn through cash.

S&P Global Market Intelligence calculated that SVB's interest-bearing beta was 20.7% last time. The bank has projected a cumulative interest-bearing beta of about 65% this time.