Deposits take center stage in banks' 2Q earnings
July 21, 2017 2:47 PM
R MACKAY - stock.adobe.com
Deposits: The hottest topic in 2Q
Now that the Federal Reserve has raised short-term rates four times in the past 18 months, all eyes are on deposit costs as banks seek to keep pricing low and fatten margins. But that effort is complicated by the fact that banks must prepare for the unwinding of the Fed's balance sheet and consumers' rapid adoption of mobile deposits.
Corporate deposits are on the move
After years of paying bargain prices on deposits, big banks — including Wells Fargo, Bank of America and others — have started to boost the rates they pay to corporate and affluent customers.
During the second quarter, Wells Fargo paid $683 million in interest on deposits, more than double its outlay from a year earlier. The San Francisco company has "implemented some incremental commercial deposit pricing in line with the market," Chief Financial Officer John Shrewsberry told analysts.
Deposit prices on the consumer side, however, have remained mostly flat industrywide.
"It's a tale of two cities," said Marianne Lake, chief financial officer at JPMorgan Chase during the company's call last week.
During the second quarter, Wells Fargo paid $683 million in interest on deposits, more than double its outlay from a year earlier. The San Francisco company has "implemented some incremental commercial deposit pricing in line with the market," Chief Financial Officer John Shrewsberry told analysts.
Deposit prices on the consumer side, however, have remained mostly flat industrywide.
"It's a tale of two cities," said Marianne Lake, chief financial officer at JPMorgan Chase during the company's call last week.
Smaller banks have started paying up
Big banks have stubbornly held off on boosting deposits rates for consumers, but their smaller competitors are already starting to move. Wintrust Financial, for instance, plans to run specials in neighborhoods where it is looking to grow, the company told analysts this week.
"We've held off for a long time, but the demand is now that we need deposits," CEO Ed Wehmer said. "So we're going to start paying up a little bit, as I reference, and try to do it on a spot basis."
"We've held off for a long time, but the demand is now that we need deposits," CEO Ed Wehmer said. "So we're going to start paying up a little bit, as I reference, and try to do it on a spot basis."
Andrew Ostrovsky/agsandrew - stock.adobe.com
What's the magic number for consumer deposit rates?
Bankers have begun to speculate how high interest rates will have to move before ordinary consumers start chasing higher rates on a much larger scale.
Deposit prices on standard checking and savings accounts have remained low, even as the Federal Reserve has hiked short-term rates to around 1% through four 25-basis-point rate hikes over the past two years.
So far the increases haven't been a strong enough incentive for consumers to chase higher yields, but bankers say they are watching the market closely.
"I think when rates start to get at 2%, consumers may begin to change their preferences and start to take the extra effort to move some money around," said Kevin Blair, chief financial officer at Synovus.
Deposit prices on standard checking and savings accounts have remained low, even as the Federal Reserve has hiked short-term rates to around 1% through four 25-basis-point rate hikes over the past two years.
So far the increases haven't been a strong enough incentive for consumers to chase higher yields, but bankers say they are watching the market closely.
"I think when rates start to get at 2%, consumers may begin to change their preferences and start to take the extra effort to move some money around," said Kevin Blair, chief financial officer at Synovus.
Andrew Harrer/Bloomberg News
Banks bracing for the unwinding of the Fed balance sheet
JPMorgan Chase CEO Jamie Dimon may have unsettled some investors earlier this month when he said that the Federal Reserve's plan to shrink its $4.5 trillion bond portfolio, expected to begin in September , may be a "little more disruptive" than people think.
"We've never had QE like this before, and we've never had unwinding like this before,"Dimon said at a conference in Paris in early July .
But during second-quarter calls, national and regional bank executives projected an image of calm. Speaking to analysts, U.S. Bancorp Chief Financial Officer Terry Dolan said that the Fed has been transparent about its plans, and that he expects the pace of redemptions to be gradual.
"I think that will cause any impacts of it to be very manageable on the banking industry, and as the market adjusts," Dolan said.
Still, bankers cautioned that the Fed's move could result in a reduction in commercial deposits over time as institutional clients step up their purchase of Treasury securities.
"We've never had QE like this before, and we've never had unwinding like this before,"
But during second-quarter calls, national and regional bank executives projected an image of calm. Speaking to analysts, U.S. Bancorp Chief Financial Officer Terry Dolan said that the Fed has been transparent about its plans, and that he expects the pace of redemptions to be gradual.
"I think that will cause any impacts of it to be very manageable on the banking industry, and as the market adjusts," Dolan said.
Still, bankers cautioned that the Fed's move could result in a reduction in commercial deposits over time as institutional clients step up their purchase of Treasury securities.
Jason Alden/Bloomberg
Going big on mobile deposits
Big banks are benefiting from their splashy investments in mobile banking . During Bank of America's earnings call last week, for instance, CEO Brian Moynihan said that 21% of all deposits at the Charlotte, N.C., company are made through smartphones and other mobile devices.
The transition to mobile among B of A's customer base will help the company save money over time, according to Moynihan.
"That's equivalent of what a thousand financial centers do," Moynihan said. "That's important for client satisfaction. It is also important because those cost one-tenth of what it costs to do it over the counter."
The transition to mobile among B of A's customer base will help the company save money over time, according to Moynihan.
"That's equivalent of what a thousand financial centers do," Moynihan said. "That's important for client satisfaction. It is also important because those cost one-tenth of what it costs to do it over the counter."
Cooper Neil/Bloomberg
Draw-down in commercial deposits is a sign of future loan growth
As the banking industry looks for signs that commercial lending is once again gaining steam, here's a hopeful indication: Middle-market customers are beginning to draw down their deposits.
It's often viewed as a precursor for loan growth. The theory is that clients are using their cash on hand to cover the cost of growth — and that credit line utilization, or demand for a commercial term loan, could be just around the corner.
"We believe that a lot of that reduction is an indicator that middle-market customers are using their excess deposits to invest in their business," said Ralph Babb, CEO at the Dallas-based Comerica.
It's often viewed as a precursor for loan growth. The theory is that clients are using their cash on hand to cover the cost of growth — and that credit line utilization, or demand for a commercial term loan, could be just around the corner.
"We believe that a lot of that reduction is an indicator that middle-market customers are using their excess deposits to invest in their business," said Ralph Babb, CEO at the Dallas-based Comerica.
Brokered deposit worries
Regulators have started keeping a closer watch on banks that rely on wholesale funding to support loan growth.
Community banks have been increasingly turning to brokered deposits in recent months. Such deposits topped $145 billion in the first quarter — their highest level in more than five years.
Banks that use brokered deposits to accelerate commercial real estate lending, for instance, should expect additional scrutiny in the months ahead.
"Liquidity risk is generally increasing for these institutions," George French, the FDIC's deputy director of risk management, said during a July 12 advisory committee meeting on community banking.
Community banks have been increasingly turning to brokered deposits in recent months. Such deposits topped $145 billion in the first quarter — their highest level in more than five years.
Banks that use brokered deposits to accelerate commercial real estate lending, for instance, should expect additional scrutiny in the months ahead.
"Liquidity risk is generally increasing for these institutions," George French, the FDIC's deputy director of risk management, said during a July 12 advisory committee meeting on community banking.
