Could the flood tide of deposits of the last few years finally be ebbing?
For some banks, the jump in interest rates has been an occasion to reconsider funding strategies, and think about locking in certificates of deposit at current prices. Recent data on money flows carries some hints that households are looking for higher yields for their savings, and deposit growth in the first two quarters of this year was weaker than it has been for some time.
Broadly, low-cost deposits remain easy to come by, however, even if growth has cooled. (The following graphic shows data on growth and amounts of deposits and money market fund shares, and on the mix of deposits used to fund bank assets over time. Interactive controls are described in the captions. Text continues below.)
A 12-week moving average of the month-over-month change in deposits was 0.3% as of July 1, the most recent date for which data is available. (The figures are seasonally adjusted and exclude time deposit accounts with balances of more than $100,000.) That’s lower than the average of 0.6% that has prevailed since 2008 but above levels in April.
The moving average growth rate for checking deposits was 0.8%, also a bit below the average of 1.2% since 2008. Changes in checking deposits have been particularly volatile in recent years, including a massive panic increase during the standoff over the federal debt ceiling in mid-2011.
Deleveraging and the flight to cash since the financial crisis have sent the ratio of deposits to bank earning assets to longtime highs: 85.1% as of the first quarter, compared with a range of 74% to 76% from mid-2004 to mid-2008. Banks have also slashed their reliance on certificates of deposit, with the ratio of time deposits to earning assets dropping 10.6 percentage points from a peak in the fourth quarter of 2008 to 13.4% in the first quarter (see the third tab in the graphic above).
When rates were higher during the middle of the last decade and loan growth was strong, there was no sustained outright drop in deposits — banks create deposits when they lend. But banks had to bid up for funding, and growth rates soared in time deposits, which are generally the more expensive kind.
Over the last few weeks, balances in retail money market mutual funds have been climbing. Overall, more than a trillion dollars has bled from money funds (including the institutional sector) since mid-2009, with much of the outflow going to bank deposits. In a note this month, Joseph Abate, an analyst at Barclays Capital, reckoned that the growth in retail money funds was being driven by households retreating from recent volatility in equity markets, with redemptions landing in linked money fund accounts.
During Webster Financial’s (WBS) earnings call last Friday, Chief Financial Officer Glenn MacInnes said that deposit outflows at the bank were still primarily coming from maturing CDs that carried higher rates than are currently available. Wells Fargo (WFC) CFO Timothy Sloan noted that the company’s cost of deposits fell another basis point from the first quarter to 14 basis points in the second quarter, but said, “We did see some movement from deposits to investing in the market.”
Bank of the Ozarks (OZRK) CEO George Gleason said his company planned to increase deposit pricing in a few markets where it has a small presence to fund strong companywide loan growth. He said that “we probably have hit the bottom on deposit pricing” at 23 basis points for interest-bearing accounts in the second quarter, and that the figure could increase a modest 1 or 2 basis points a quarter in the second half of the year.
JPMorgan Chase (JPM) CFO Marianne Lake said her company had not been compelled to increase deposit prices because of the rise in interest rates. “Not yet. And as you know, traditionally that would, in any case, lag. Of course, that doesn’t mean it will, but that’s traditionally what happens.”