Bankers’ outlook on funding costs has grown decidedly cloudy compared to their expectations from a year earlier, according to a new survey from IntraFi.
In the company’s third-quarter banker survey, 62% of participants said their funding costs have risen over the past 12 months, up from 25% a quarter earlier. Looking ahead, 87% expect funding costs to climb over the next year, nearly double the share who said so last quarter.
The shift is sharp and nearly unanimous. Only 2% of respondents expect funding costs to fall in the year ahead; none expect a significant decrease.
Bankers tie much of the pressure to the bond market. Asked about the most significant effect of current long-term rates and bond market volatility over the next year, 58% pointed to higher funding costs or margin pressure. Another 16% cited further unrealized securities losses that limit capital flexibility, while 17% expect no material effect.
Competition for deposits is heating up, too. Fifty-five percent of executives said competition has risen in the past year, and three-fourths expect it to intensify over the next 12 months. Just 1% expect easing.
A combination of rising rates and more aggressive deposit pricing showed up in third-quarter earnings, with several banks citing a late-quarter Fed rate hike as a driver of higher deposit costs.
Bankers are split on whether swings in their securities portfolios should change their growth plans. Forty-seven percent said they will keep their current balance sheet strategy, and 53% plan at least one change over the next 12 months.
The most common move, cited by 22%, is accepting lower securities balances in favor of loans or cash. Eighteen percent aim to increase deposits or contingent and wholesale funding, and 16% are shifting toward shorter-duration or more liquid securities. Smaller shares are changing the composition of their securities purchases (11%), slowing loan growth to preserve liquidity or capital (8%), or using or considering hedging, including derivatives (8%).
The funding squeeze comes as bankers grow more cautious about growth. While 39% said loan demand has increased over the past year, only 28% expect it to rise over the next 12 months, and about a third expect it to decline.
The economic outlook has darkened as well. Forty-two percent of executives expect economic conditions to worsen over the next year, nearly double the 23% who said conditions have deteriorated over the past 12 months. Only 16% expect improvement. Access to capital is the one steady spot, with 78% expecting it to remain unchanged.
The survey also asked whether banks are developing products for homeowners locked into low-rate mortgages. Most are not: 74% said they aren’t pursuing anything aimed at the issue. Among those who are, bridge or home-equity financing (14%) and adjustable-rate or lower-payment mortgages (13%) were the most common approaches.
IntraFi conducted the survey online from Oct. 5 to Oct. 19. It drew 411 responses from bank leaders across the U.S., with CFOs making up 56% of the respondents.