Is The Cd On The Endangered Species List?

Just a few years ago, banks couldn't sell enough of them. Bank windows and newspaper pages were plastered with offers of double-digit rates on bank certificates of deposit. Now, it's as if CDs are out of stock. Ads are few and far between, and rates range from unattractive to repugnant. The yield on one-year CDs has dropped 60% from its 1989 levels, from 9.5% to 3.8%. Savings held in CDs have plummeted more than 20% since January, 1991, from $1.2 trillion to $947 billion. Some industry watchers say the CD, once the backbone of bank balance sheets, may have outlived its usefulness and could slowly fade away.

Are bankers worried? In a word, no. As they see it, the shrinkage is largely cyclical, a reflection of the recession and lagging loan demand. "As the economy has weakened and loan demand is way off, there's no need for banks to replace their funds, so they're not aggressively bidding up CDs, or going after deposits," says Robert Heady, publisher of Bank Rate Monitor, an industry newsletter.

Bankers insist that as soon as the economy and loan demand pick up, they can attract all the CD money they need. But once consumers cash in CDs and sample higher-yielding products, they may be reluctant to come back to the banks. "In the future, banks will have to raise CD rates very high to peel customers away from long-term bonds and stocks," says Geoffrey W.G. Nicholson, vice-president in the New York office of Boston Consulting Group Inc.

At the moment, banks appear more interested in retaining profit margins than CD customers. Take the banks' prime-rate cut, to 6%, on July 2. "Typically, you would see savings yields on CDs fall by a quarter-point or more over the first six to eight weeks" after a cut in the prime rate," says Heady. But this time, the banks cut savings yields by a full quarter-percent in the first two weeks after the prime went down.

Banks are blase about CDs for reasons other than the falloff in lending. The CD has a razor-thin profit margin compared with money-market funds, which pay lower interest, and checking accounts, which often pay no interest (table). Also, CDs tend to attract money that jumps from bank to bank chasing yield. Banks make the most money from customers with whom they can develop long-term, multiple-product relationships.

Some banks, such as Chase Manhattan and Citibank, aggressively market their own families of mutual funds, as well as other families of funds sold through the bank, to holders of maturing CDs. Citi has been especially enterprising. The share of CD money that is rolled over into new CDs at Citi has dropped from nearly 90% in the 1980s to about 70%. The bank has lost $3 billion in the past 18 months. Still, it claims that close to half of that has been switched into funds and other products marketed by Citi. That produces fee income but doesn't add to a bank's deposit base.

TOUGH SELL. An economic rebound will surely reignite demand for bank loans, and most bankers feel sanguine that the basic appeal of the CD will then bring consumers back. "Many of our customers have a desire for the guaranteed returns and insurance that a CD provides, and that's not going to go away," says W. Mitchell Ratliff, group marketing manager for Chase's retail division.

Yet winning back customers may be tougher than banks expect. Savers turned investors will be accustomed to higher returns on mutual funds. Government-bond funds, for instance, now show a 12.5% average annual return. And baby boomers, who are entering their peak earning years, may not have as much loyalty to banks as their parents. "Baby boomers are more attuned to investment than bank savings," says Edward E. Furash, president of Washington-based consultants Furash & Co. "When rates tick back up, why should they leave stocks and long-term bonds?"

Over the long run, the outlook for the CD is cloudy. Banks for years have been losing loan-market share tm the commercial-paper market and nonbank lenders. Many banks have been gravitating toward other sources of income, such as trading. "I think the CD will be extinct in the next few years," says Charles Clough, chief investment strategist at Merrill Lynch & Co. While that may be an overstatement, it's clear that the challenge for banks is to evolve into better marketers of nontraditional products. If they don't, they themselves may be an endangered species.

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