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According to Bloomberg, State Street Corporation (STT - Analyst Report) and The Bank of New York Mellon Corporation (BK - Analyst Report) will begin to charge depositors for holding Danish kroner and Swiss francs deposits. This move is a part of these banks’ strategy to re-establish a decent profit margin between what has been paid for deposits and what has been earned on investments.
State Street plans to put a negative interest rate of 0.75% annually on Danish kroner commencing from November 1, 2012. This implies that big institutional depositors like money managers, insurance companies and pension funds will have to pay a certain amount to the bank to hold their deposits. Further, the bank plans to charge a 0.25% interest rate on Swiss franc deposits.
Customers with accounts in these two currencies exceeding the minimum levels will have to bear these charges. At current exchange rates, the minimum levels are fixed at 225,000 kroner ($39,000) and 100,000 francs ($107,000).
BNY Mellon has levied a charge on Danish kroner deposits, but has still not imposed any negative interest rate on Swiss francs. This was done to recover the cost of managing these deposits.
Last year, BNY Mellon announced a charge of 0.13% interest on deposits of $50 million or more to dissuade customers from stashing more and more money into their accounts. However, this was not implemented, as a marked change was witnessed in the deposit habits of clients and due to the settlement of the debt-ceiling crisis at that time.
Since the Euro Zone crisis is deepening, investors have started drifting to other safer currencies deserting the volatile Euro. European nations, namely Denmark and Switzerland, have slashed interest rates below zero levels to stop their currencies from rising. Therefore, the Danish kroner and Swiss francs offer less risk compared to Euro.
Moreover, the Triple A ratings of these two countries, combined with a current account surplus and a government debt burden that is less than half the Euro zone’s average, make these currencies very appealing. Therefore, big financial institutions have resorted to applying negative interest rates on Danish kroner and Swiss francs deposits.
The application of negative interest rates will definitely discourage big institutional clientele from stashing more deposits into the banks. For banks, this will reduce the deposit levels as well as the cost of managing these deposits. Further, it will relieve them of the trouble to mobilize the cash into the economy as the loan demand is slowing down.
State Street and BNY Mellon currently retain Zacks #3 Ranks, which translates to short-term Hold ratings. Considering the fundamentals, we also maintain a long-term Neutral recommendation on both stocks.