Will bank profits lead to higher money market rates?
January 17, 2011
A resurgence in profitability is expected to lead to restored dividends for bank stocks this year, after a three-year lull brought on by the financial crisis.
What's in it for you? Of course, if you own bank stocks, the restored dividends will mean some extra cash in your pockets, but even as a bank customer you might benefit from the financial success of banks.
The road to recovery
The financial crisis forced banks to slash their dividends. Collectively, banks in the S&P 500 (i.e., large, publicly-traded U.S. banks) cut dividends to less than 40 percent of their pre-crisis levels. This was because heavy losses demanded that banks hold on to as much cash as they could, rather than paying it out to shareholders.
Last year saw a reversal of those losses for the banking sector. 2010 bank earnings are expected to reach $70 billion, up sharply from $12.5 billion in 2009. This may only be half of peak levels from 2006, but it is a step in the right direction.
The outlook for CD, savings, and money market rates
So where do money market rates and the interest on other deposit accounts enter into this picture? To some extent, the extremely low rates banks are able to pay for the working capital provided by depositors has helped banks recover their profitability. When you are paying less than 1 percent, as most banks are, for the use of other people's money, it isn't hard to find investments and business activities that will earn a profit.
Customers may be on the wrong end of that deal, but as banks once again start to profit from how they use depositor's money, they will want to attract more of those deposits. This profit motive should give banks an incentive to raise interest rates.
For a number of reasons, it may be hard to cheer on the big banks as they announce their improved profits. However, if you remember that ultimately you might be rooting for a rise in CD, savings, and money market rates, you might start to get some joy out of the good fortunes of the banking sector.
No Stocks 4me Cramer
18 January 2011 at 8:01 am
LOL yeah sure they will!
This is like when the price of oil goes down by a cent the price of a gallon of gas stays where it is, when the price of oil goes up by a cent the price of a gallon of gas goes up 2 cents right away. So it is with these banks, when uncle ben does finally raise rates, the banks will damned sure take their sweet time raising the savings rates, but you saw how fast they dropped when uncle ben cut rates.
I think the only thing that might get them up is the slow but steady rise in anger of the retiree's who have been getting a bit louder on this stuff since the no COLA thing is now in its 2nd year. With no COLA and no decent rates on CD's or money markets those that were making it OK before are now having a harder time, and some with low savings are now having to dig into the principle of a maturing CD, which along with the lower rate on a lower principle is slowly eroding their savings.
Still waiting for the pigs to start flying and the cow to jump the moon, smirks