Funding costs dropped sharply in the fourth quarter of 2019, with some U.S. banks saying they have more room to fall as the industry implements additional price reductions and as low interest rates filter through portfolios.

CIT Group Inc. said in late January 2020 that it had trimmed the rate on its flagship online savings account by 65 basis points since May 2019 as the Federal Reserve cut its policy rate by 75 basis points in the second half of 2019. The New York-based bank said it had not encountered meaningful withdrawals, and that it planned to lower rates a bit more in the first quarter of 2020.

Citizens Financial Group Inc. similarly said it expects its deposit prices to continue to fall through the first half of 2020 if the Fed remains on hold and the interest rate environment remains relatively stable. The bank also gave guidance that further declines could diminish later in the year, though it could continue to benefit from maturing time deposits.

Overall, U.S. banks' cost of funds fell 12.5 basis points from the third quarter to 0.84% in the fourth quarter of 2019 after notching down by less than a basis point from the second quarter to the third quarter, according to S&P Global Market Intelligence data. The fourth-quarter decline was larger in magnitude than any quarterly increase when costs were rising during the most recent Fed tightening cycle. The largest increase in banks' cost of funds in that time frame was a 10.7 basis point jump during the fourth quarter of 2018.

The cost of savings deposits, which represent the bulk of bank funding at more than two-thirds of total deposits, fell 8.7 basis points from the third quarter to 0.54% in the fourth quarter, the first quarterly decline since the beginning of 2016. The cost of interest-bearing transaction accounts tumbled 33.2 basis points from the third quarter to 1.29% in the fourth quarter.

The declines were broad-based, with all 20 of the largest banks posting sequential drops in funding costs in the fourth quarter and a median decrease of 14 basis points. Goldman Sachs Group Inc. unit Goldman Sachs Bank USA, which offers online accounts under its Marcus brand, posted a quarterly decline of 47 basis points in the cost of its savings deposits, to 1.81%.

Across the industry, balances continued to rotate out of certificates of deposit and into savings and transaction accounts. The share of deposits in time accounts fell a substantial 0.6 of a percentage point from the third quarter to 15.4% in the fourth quarter, while the share in demand accounts increased 0.4 of a percentage point to 17.6%.

Maturing time deposits should particularly help lower funding costs at banks that have large portfolios of them. In notes in February, analysts at Janney Montgomery Scott calculated that certificates of deposits due to mature in 2020 represent more than 20% of total deposits at banks including New York Community Bancorp Inc., Hope Bancorp Inc., Bank OZK, Valley National Bancorp and BankUnited Inc. Time deposits "represent a significant opportunity to reduce funding costs and improve" net interest margins, they said, noting that rates have fallen substantially in the past year.

But even if lower funding costs help NIMs to bottom out and stabilize in 2020, asset yields have also been under heavy pressure and analysts expect narrow margins to restrain banks' revenue growth over the medium term.

Further, banks with low-cost funding bases have less room to maneuver. JPMorgan Chase & Co. has repeatedly advised that it expects its deposit costs to be symmetric, with modest increases on the way up limiting decreases available now. In January, the bank said that a mix shift toward time deposits was continuing to put upward pressure on costs in its consumer portfolio, even though declines in rates on wholesale accounts had accelerated.

Bank of America Corp. said in January that it plans to roll out some additional, modest reductions in deposit pricing, even though the rate it pays on retail accounts appears to have bottomed out at about 11 basis points in the fourth quarter of 2019, flat with the third quarter.

Both BofA and JPMorgan Chase have been extremely successful in building up their portfolios of consumer transaction deposits in recent years. Overall, the share of Bank of America NA's deposits held in transaction accounts increased 4.2 percentage points from the third quarter of 2015 to 20.7% in the fourth quarter of 2019, according to S&P Global Market Intelligence data. For JPMorgan Chase Bank NA, it increased 3.6 percentage points to 26%.

Both BofA and JPMorgan Chase have also asserted that low rates should reinforce deposit flows that play to their strengths in technology, services and product breadth, with the yields offered by competitors becoming less attractive.