J.P. Morgan to Increase Deposit Rates for Some Big Clients in January

J.P. Morgan Chase & Co. will raise deposit rates for some of its biggest clients in January, according to a person familiar with the matter, following the Federal Reserve’s decision to raise interest rates this month.

The move by J.P. Morgan, the largest U.S. bank by assets, makes it an early mover among its American rivals.

Hours after the Fed’s decision on Dec. 16, the largest U.S. banks announced increases in the prime rate, a reference rate for a variety of loans including credit-card debt. But most banks didn’t make any corresponding increases to the interest they pay to depositors. The moves signaled that most banks hoped to pocket the gains from the Fed’s move, at least for now.

Net interest margins, or the difference between what banks pay for deposits and what they earn on loans and investments, have been squeezed in recent years by low interest rates.

“They’re so compressed there’s no question they’ll keep the majority if not all of” the benefits of the first rate increase, said Lance Pan, director of research at Capital Advisors Group Inc., an investment-advisory firm.

The deposit-rate increase by J.P. Morgan will affect most institutional clients, and the size of the increases will vary, the person said. They will apply to “operating” deposits, which are less likely to be withdrawn in a crisis. The move won’t affect deposits of retail clients.

Representatives for Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. said there has been no change to deposit rates at the banks. Representatives for Goldman Sachs Group Inc. and Morgan Stanley declined to comment.

The Fed’s decision to lift its benchmark interest rate by a quarter percentage point marked the end of an era that had pinched banks’ lending profits. Lenders anticipate that higher rates will provide an immediate boost to lending income, while also possibly helping loan demand.

In a rising rate environment, deposit-rate increases typically lag behind increases in loan rates, which is why banks can make more money when rates go up.

Marty Mosby, an analyst with brokerage Vining Sparks, estimates that large U.S. banks will raise rates on interest-bearing deposits by less than 0.1 percentage point in the wake of the Fed’s move. Meanwhile, the prime lending rate rose to 3.5% from 3.25% after the Fed announcement.

Some uncertainty remains as to how exactly the rate increase will play out in deposit rates, given new regulations that make some deposits more valuable than others.

Operating deposits are more attractive to banks than excess, or “nonoperational,” deposits, which are considered riskier. New regulations require that banks hold bigger capital cushions for deposits considered riskier such as noninsured balances held by hedge funds.

Banks in the U.S. have moved aggressively in the past two years to reduce those nonoperational deposits. State Street Corp. this year took the unusual step of charging some clients for large deposits, and J.P. Morgan cut that type of deposit by more than $150 billion in 2015.

Rate increases on consumer deposits have been scarce since the Fed announcement, said Greg McBride, chief financial analyst of Bankrate.com, a website that tracks consumer rates. He said the few rate increases have been on longer-term certificates of deposit at two small lenders.

While most U.S. banks are holding firm on deposit rates, some large Canadian banks have in recent weeks increased deposit rates on U.S. dollar-denominated accounts in Canada.

Toronto-Dominion Bank, Bank of Nova Scotia and Canadian Imperial Bank of Commerce are among the Canadian banks that have increased deposit rates for certain U.S. dollar-denominated corporate accounts, according to representatives for the banks.

Representatives for Royal Bank of Canada and Bank of Montreal declined to comment.

Victor Dodig, chief executive of CIBC, Canada’s fifth-largest bank, has spoken publicly about the bank’s desire to expand in the U.S. CIBC’s business banking clients, which deploy capital in the U.S., often park some deposits with rivals, including regional and global U.S. banks.

“There’s a very real risk over time that we lose those clients if we can’t back them across the border,” Mr. Dodig said during CIBC’s investor-day presentation on Oct. 7.

Canadian lenders are tapping the U.S. market for growth. Low interest rates and slumping oil prices coupled with a sluggish domestic economy are clouding the outlook for Canada’s banks, which generate the bulk of their profits in their home market.

As a result, Canada’s biggest banks are seizing more growth opportunities south of the border, including in corporate banking, private banking and wealth management.

Write to Sarah Krouse at sarah.krouse@wsj.com, Rita Trichur at rita.trichur@wsj.com and Rachel Louise Ensign at rachel.ensign@wsj.com

By SARAH KROUSE, RITA TRICHUR and RACHEL LOUISE ENSIGN

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