Certificate of deposit balances at US banks jumped by more than a trillion in 2023, with concentration reaching its highest level in about 10 years amid growing rates in the market.
In aggregate, certificate of deposit (CD) balances at US banks climbed to $2.870 trillion in the fourth quarter of 2023, up 6.9% from the previous quarter and 68.0% year over year, S&P Global Market Intelligence data shows. While the CD balances continued to rise, the rate of growth has slowed since increasing 24.8% in the first quarter of 2023.
The CD concentration rose to 15.3% at the end of 2023, the highest level since the second quarter of 2013, with total deposits increasing 1.4% during the period after declining for six consecutive quarters.
The CD concentration dropped to 6.3% at the end of the first quarter of 2022 as deposits from the pandemic stimulus pushed the noninterest-bearing deposits concentration to 28.9% at the end of 2021 when the rates were low. The Federal Reserve's rapid increase in rates to curb inflation helped bring the noninterest-bearing deposits concentration down to 21.8% as of Dec. 31, 2023, the lowest in the last decade, as customers began moving their money more aggressively into higher interest paying accounts.
New York Community Bancorp Inc. which ranked as the lowest-valued bank at the end of March 2024 according to a Market Intelligence analysis, was among the banks with the highest increase in CD concentration during the fourth quarter of 2023. While total deposits for the company declined 1.6% during the quarter, CDs were up 21.1% to $22.47 billion as of Dec. 31, 2023.
The average rate on a one-year $10,000 CD at the bank was over 4% at the end of August 2023 and 3.65% at the beginning of 2024 but has since dropped to 1.57% as of March 22, after disappointing fourth-quarter 2023 earnings. The bank disclosed 5.2% deposit outflows in the Jan. 1–March 5 period.
The subsidiary of the second-cheapest bank in the March 28 analysis, Blue Ridge Bank NA, also made it to the list with the fourth-highest quarterly increase in CD concentration of 8.5 percentage points. The bank had $892.3 million in CD balances representing 34.7% of its total deposits as of Dec. 31, 2023.
Growth returns in nonbrokered deposits
Borrowings continued to decline in the fourth quarter of 2023 as banks move onto cheaper alternatives to fund liquidity. Federal Home Loan Bank advances were down 0.6% year over year to $584.29 billion after rising 36.9% in the first quarter of 2023. Much of the borrowings in the first quarter was a result of banks creating a cushion to protect their liquidity in the event of deposit outflows.
On the other hand, brokered deposits continued to rise, albeit at a slower pace, up 3.9% quarter over quarter to $1.347 trillion. Growth in nonbrokered deposits returned after declining for six straight quarters as they were up 0.9% to approximately $16 trillion.
Margins will likely remain compressed
Banks continue to offer higher rates on products such as one-year $10,000 CDs to retain core deposits. As of March 22, 734 banks offered an average rate of more than 4% on one-year $10,000 CDs, compared to 646 banks three months ago and 66 banks at the end of 2022, according to Market Intelligence data.
As these expensive deposits remain on the books for at least another 12 months, any potential rate cuts from the Federal Reserve in the second half of this year are unlikely to have a significant impact on the high cost of funds. Asset yields continue to climb but muted lending activity due to lack of demand and credit concerns may not be enough to ease pressure on margins in 2024.
Banks prepare for potential rate cuts
Large time deposits at US commercial banks rose 2.3% in the Jan. 1–March 27 period, according to seasonally adjusted data in the Federal Reserve's H.8 report on bank assets and liabilities. The average weekly change in large time deposits during the first quarter was 0.2%, compared to 1.2% a year ago, and dropped for four consecutive weeks in March.
As deposit growth returns, up 1.2% year-to-date, concentration of large time deposits also fell, to 9.39% as of March 27 compared to the peak of 9.61% a month ago. Borrowings declined 1.6% while loans were up 1.0% during the same period.