Bank Rates May Take a Cue From Bank Earnings
July 07, 2010
With the second quarter of 2010 now behind us, banks are expected to release earnings reports that show a drop-off from a strong first quarter, at least for some of the industry's leaders. You don't have to be invested in bank stocks to find that significant -- just being a depositor is reason enough to care about bank earnings.
While there is not a direct correlation between bank profits and savings account rates, money market rates, or CD rates, there is reason to believe that improvement in bank profits would ultimately result in higher bank rates.
Deposits in savings accounts, money market accounts, and CDs are the basis for many of a bank's other activities, from making loans to trading in the financial markets. The more profitable those activities are, the more incentive the bank has to pay higher rates to attract deposits. Bank earnings reports are quarterly indications of how profitable a bank has been.
Unfortunately, the lending business remains lackluster due to the housing slump and continued weakness in the economy. As for trading profits, they did boost first quarter earnings, but don't look for a repeat performance in the second quarter. The U.S. stock market posted a decent gain in the first quarter, but suffered a double-digit loss in the second quarter. While it is possible to make trading profits in a down market, doing so is rather like swimming against a strong current.
In short, the weak market in the second quarter might further test to patience of depositors waiting for higher bank rates. Ironically though, that same market makes the alternative of abandoning conservative deposits even less attractive.
