Magazine article American Banker

Good News on Deposits (but Will They Stick?): Patterns Suggest Some Recent Inflows May Be Short-Lived

Magazine article American Banker

Good News on Deposits (but Will They Stick?): Patterns Suggest Some Recent Inflows May Be Short-Lived

Article excerpt

In a bleak first quarter for profits in general and credit quality in particular, deposits were a relative bright spot.

Many banks' deposits increased in the period and they were able to lower the interest rates they paid their customers, which nudged net interest margins higher.

James Abbott, an analyst with Friedman, Billings, Ramsey & Co., called the growth "a strong acceleration," especially next to the "pretty anemic" increases of the previous four quarters.

Deposits rose almost 2% from the fourth quarter among 119 mostly midcap companies Friedman covers. According to KBW Inc.'s Keefe, Bruyette & Woods Inc., big banks' deposits rose even faster. The largest 13 companies KBW follows posted 5% deposit growth, and margins expanded 10 basis points, to 3.29%.

A deeper look does reveal some caveats - the companies' growth rates varied widely, and money market accounts attracted much of the new deposits. While less expensive, these deposit accounts are also harder to retain. "People are shifting into effectively lower-cost money" - lower in cost for bankers - "while they are waiting to figure out how much rates are coming down and in what to invest," said Morgan Stanley analyst Betsy L. Graseck.

Christopher M. Mutascio, a large-cap bank analyst with Stifel, Nicolaus & Co. Inc., said customers with maturing certificates of deposit are "not ready" to buy new ones, "because rates are low. So they are just parking their money in money market accounts and get a somewhat decent rate compared to CDs, and wait to see how it plays out."

The faltering economy might reverse first-quarter deposit growth, he said. "Consumer-driven deposit growth will be hard to come by."

Bankers have been careful not to drop deposit rates as fast as the Federal Reserve Board has lowered interest rates, said Aaron Fine, a partner in retail and business banking of Marsh & McLennan Cos.' Oliver Wyman. The first quarter was "the most competitive pricing environment in some time, with banks pricing well above the [benchmark] interest rates," he said.

"There was a dramatic fall in interest rates," namely the London interbank offered rate, which lowered bankers' funding cost broadly, Mr. Fine said. "But deposit costs, particularly for higher-rate money markets, didn't fall nearly as fast."

Some of the more subtle shifts in the deposit business have not yet developed into trends.

For example, Mark Chancy, SunTrust Banks Inc.'s chief financial officer, said the "majority of the growth is occurring in interest-bearing NOW and money market accounts." But, he said, the Atlanta company saw "early signs of a cyclical shift in commercial client balances out of sweep accounts" into demand deposit accounts.

Mr. Mutascio and Ms. Graseck said there is little evidence of widespread migration into bank deposit accounts from the capital markets and brokerage firms. …

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