In a dismal earnings season, Wachovia Corp. has found a silver lining.
A month ago, the Charlotte bank embarked on a mission to build up its CD portfolio by offering interest rates well above the going market rate. It's good news for savers, and it's also done the trick in building up deposits for the bank: Customers are opening $4.7 billion in new CDs per week, compared to $800 million per week just before the June 22 launch. Wachovia is paying 4 percent interest on seven-month CDs, versus a national average of 3.1 percent for comparable CDs. It's also offering good rates on 12-month CDs.
CDs, or certificates of deposit, are short-term savings accounts. Savers agree to keep their money in for a certain amount of time, which can range from a few months to a few years. In exchange, they usually get a higher return than they could on a checking, savings or money market account.
For the banks, building up CDs is a relatively low-cost way to build capital right now. That's because the rates that banks pay on new CDs have been falling since last September, when the Federal Reserve began slashing its interest rate. That rate is closely tied to the rates on most savings accounts.
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Earlier this year, Wachovia took about $8 billion in CDs off its books when they matured. They had been opened in early 2007 and were relatively high-priced, paying around 5 percent interest.
Wachovia has about $125 billion in CDs on its books, accounting for about 44 percent of all deposits in the general bank.
Meredith Whitney, an analyst at Oppenheimer & Co., questioned Wachovia's CD strategy during the bank's second-quarter earnings call on Tuesday. She asked why Wachovia is building up CDs when it could concentrate on building up deposits that require even lower interest rates. (Wachovia's deposits in money market and checking accounts, which generally pay lower interest rates than CDs, both increased over the year.)
The bank's chief financial officer, Tom Wurtz, replied that the CD campaign has attracted new customers, served the needs of existing customers, and built Wachovia's brand name. He also defended the financial attractiveness of the campaign.
“If you look at the raw rate that's paid, you may think that's a high incremental cost,” Wurtz said. “However, the reality is customers tend to renew their CDs upon maturity. (And) customers tend to buy other products during the term of their CDs.”
Thursday evening, Wachovia announced that Wurtz is leaving the bank but didn't give a reason.
At crosstown rival Bank of America Corp., chief executive Ken Lewis said this week that the bank made building deposits a priority at the beginning of the year.
Last week, the bank announced it would also pay 4 percent for seven-month CDs, though it requires a higher minimum deposit than Wachovia does.
On Friday, Bank of America said it would extend hours at branches in some cities today, to meet demand for the new CD.