Bank deposit slip
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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.
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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.
Ed Wehmer, CEO of Wintrust Financial.

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."
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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.
Federal Reserve building.
The Marriner S. Eccles Federal Reserve building stands in this photograph taken with a tilt-shift lens in Washington, D.C., U.S., on Tuesday, Sept. 1, 2015. Bill Gross said the Federal Reserve has waited so long to raise interest rates that any move now may be labeled "too little too late" as market turmoil restricts the room for policy makers to act. Photographer: Andrew Harrer/Bloomberg

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.
Bank of America CEO Brain Moynihan.
Brian Moynihan, chief executive officer of Bank of America Corp., looks on during a panel session at the World Economic Forum (WEF) in Davos, Switzerland, on Thursday, Jan. 19, 2017. World leaders, influential executives, bankers and policy makers attend the 47th annual meeting of the World Economic Forum in Davos from Jan. 17 - 20. Photographer: 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."
Sign outside Comerica Bank headquarters in Dallas.
Signage is displayed on the exterior of Comerica Inc. Bank headquarters in Dallas, Texas, U.S., on Monday, July 10, 2017. Comerica Inc. is scheduled to release earnings figures on July 18. Photographer: 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.
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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.
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