Will profit motive spur deposit rates?

The Wall Street Journal recently reported that December has been the busiest month for bank mergers and acquisitions in more than two years. Could this mark a turning point for beaten-down interest rates on savings accounts, money market accounts, and other deposits?

For bankers, love is in the air

Hancock Holding Company recently agreed to buy out rival bank Whitney Holding for $1.5 billion worth of Hancock stock. The combination creates a bank with $20 billion in assets--quite a substantial figure for a regional bank. Even more significant is the fact that this acquisition is part of a trend towards increased merger and acquisition activity in the banking business.

Why are banks trending towards mergers and acquisitioins? For some banks, raising capital can help them retire their TARP obligations, but the market is still too skeptical to offer a good price for new stock offerings by banks. Banks in a strong financial position are happy to oblige competitors seeking capital by buying them out--this can be viewed as a classic opportunity to buy when prices are depressed.

Will banks get more aggressive about deposit rates?

In the spirit of buying low, the merger and acquisition trend might also represent a sign of hope for interest rates on savings accounts, money market accounts, and other deposits.

Essentially, deposits represent two forms of value to bankers. They can act as capital to be loaned out as a profit, and they can also be a customer acquisition tool which creates an opportunity to cross-sell investment services and other profitable products.

The lending business is still being held back by a sluggish economy. However, that same sluggish economy may force banks to become more aggressive about finding ways to grow.

The recent merger and acquisition activity may be a sign that this is beginning to happen. Raising interest rates on savings accounts, money market accounts, and CDs would be another way of getting aggressive about adding new business. In fact, with many deposit rates barely above zero, it could represent an opportunity for shrewd bankers to acquire new relationships at bargain prices.

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