For many banks, deposits are a big issue. I was with a group of nine bankers recently who concurred that attracting and maintaining deposits is among their top concerns. In some cases, banks have so much loan demand that even if they pay up for CDs, they have trouble funding their loans. Wholesale money is expensive, although having shifted their focus to the broader issue of liquidity, regulators do not seem as concerned specifically about brokered deposits as they once did.
Statistics show that deposits are coming into the banking system, but most customers are stashing their cash with the bigs. The FDIC reports that on March 31, 2018 the nation's banks held about $1.4 trillion more in deposits than they did one year earlier. The smallest banks — the 26 percent of institutions with $100 million in assets or fewer — experienced aggregate deposit growth of 4.3 percent. Meanwhile, banks with more than $100 million saw their deposits grow by 11.3 percent. A microcosm of this trend is evident in Iowa, where during the 12-month period ending March 31, 2018, deposits across the state's 294 banks grew by 10 percent, but across the 95 banks with $100 million in assets or less, deposits were essentially flat.
An article in the June 23 Wall Street Journal reported large banks are paying bonuses to new customers to attract deposits. JPMorgan Chase, Wells Fargo and SunTrust are reportedly paying some new customers $150 to $500 if they open a deposit account. This is not a new practice. Over the years, I have received several offers of $50 or more to open a new account. The incentives were never enough for me to follow up. But apparently, these latest offers are making a difference.
Interesting to me was the assertion that the bonuses allow banks to maintain a lower net interest margin (a figure closely watched by bank investors) than if they paid higher interest rates. "…These bonuses can have the benefit of being tucked away in obscure parts of earnings reports where they don't weigh on closely followed profitability metrics," was how the article put it, implying management at the bigs believe investors are more attracted to a bank's stock if the bank reports a lower NIM. I find it hard to believe any investor worth their salt is duped by this tactic. A bank whose expenses are out of line is going to raise as many red flags as one with an NIM higher than peers. A bonus may or may not be a good way to attract a new customer, but I really don't believe the move has any effect on investor interest in the bank's stock. I'd be interested in hearing your take on this tactic. (tom@NFRcom.com)
For most banks, funding is a matter of responding to the interest rate environment. Traditionally, banks are slow to raise deposit rates in a rising environment, and quick to lower them in a falling rate environment. There have been seven interest rate hikes since 2015. The WSJ, citing a BofA analyst, reports, "banks have passed along only 18 percent of the benefit from higher rates to customers."
Interest rate challenges aside, banks in general are making good profits. All of the nine bankers I visited with said their institutions were doing very well. Certainly, changes in the interest rate environment pressures management; so far, it doesn't appear to be enough to negatively affect earnings, at least among community banks in the Midwest.
