Deposits, Deposits, and Deposits!
Much has been said in the last year about the flat yield curve and its impact on bank margins and profitability. But the shape of the curve is only part of the story. A key element in the success of any bank is its ability to garner and keep core deposits.
As they say in real estate, value is about location, location, and location. In banking, that adage becomes "deposits, deposits, and deposits." If real estate is about the location of the assets, banking is unusual because value to investors is substantially based on the biggest class of liabilities - notably low-cost core deposits rather than assets. In this issue of the Deposit Monitor, we want to review the trends in deposit growth in some of our key markets, by size of bank in the last decade, and by the type of deposits that have been dominating deposit growth in recent years.
Figure 1: Trend in Deposit Growth (as of the end of June)1
In Figure 1, we plot the deposit growth rates by asset size range for banks between June 1996 and June 2005. A few conclusions seem to be apparent.
- Deposits nationally grew at less than 5% prior to 2000 and by more than 5% after 2000. This coincides with the bull stock market of the '90s and the big selloff between 2000 and 2003. Between June 1995 and June 2000, the S&P grew at CAGR of 21.7% and, in the next three years, declined more than 33%.
- As of June 1, 2006, the S&P is still trading around 1275, less than its 2000 high of 1498.58. As of 12/31/2005, the total return on the S&P 500 for the previous decade was 9.1%, less than the 10% expected return investors usually assume to be "normal."
- Banks with assets of more than $3 billion are growing deposits faster than the national average, while the other asset classes are growing below the national average. All other asset ranges appear to be falling behind the national average.
- However, the data does reflect the impact of mergers and acquisitions on deposit growth. Banks with assets of more than $3 billion account for 3% of all banks in 2005 versus 2% in 1995. However, they represent 80.8% of all deposits versus 65.7% in 1995.
- Banks between $1 billion and $3 billion appear to have the most volatility in deposit growth, but that probably reflects the impact of M & A activity as larger banks buy or merge with banks in this sector.
- In this 10-year period, the total number of banks declined from 12,282 to 8,855. Keep in mind that there were also a large number of de novo banks founded in this same period, making the competition for deposits one of the toughest battles in the markets.
We also wondered how deposits grew in several markets where we do business -Pennsylvania, Massachusetts, Indiana, New York, Virginia and Florida, versus the national average. Figure 2 compares the national growth rates with rates in these states and the BNKElite for the same periods.
Figure 2: State CAGRs in Deposits2
| |
5 Yr. CARG |
10 Yr. CARG |
| National |
8.2% |
6.3% |
| Pennsylvania |
4.9% |
3.5% |
| Indiana |
3.7% |
3.0% |
| Massachusetts |
5.2% |
5.4% |
| New York |
4.6% |
3.7% |
| Florida |
10.5% |
6.8% |
| Virgina |
12.1% |
8.5% |
| BNK Elite |
8.7% |
8.7% |
The growth in deposits in the four states is below the national average, reflecting the mature demographics of these states and the related trends, which typically are below or at national levels. In Virginia and Florida, the growth rates are more than the national average, reflecting the higher growth rates in those states. For many years, Florida has been one of the fastest growing states.
The Elite banks, which are predominantly in Pennsylvania, have exceeded the national and state average for deposit growth consistent with their superior performance. That is no small achievement given the demographics in the state and the competitiveness for deposits both from banks and nonbank institutions.
Figure 3: National Growth in Deposits by Type3
| |
2004-2005
% Change |
2003-2005
% Change |
| Demand Deposits |
-5.70% |
6.5% |
| Checkable Deposits |
-3.09% |
13.7% |
| Commercial Banks |
-3.70% |
17.2% |
| Thrifts |
-2.28% |
9.5% |
| Savings Deposits |
2.86% |
30.7% |
| Commercial Banks |
5.22% |
34.9% |
| Thrifts |
-4.17% |
18.8% |
| <$100,000 Time Deposits |
19.22% |
9.0% |
| Commercial Banks |
16.91% |
7.8% |
| Thrifts |
23.86% |
11.3% |
| >$100,000 Time Deposits |
26.64% |
71.4% |
| Commercial Banks |
23.78% |
67.1% |
| Thrifts |
42.89% |
96.4% |
| Total Growth |
8.46% |
30.9% |
In Figure 3, we have presented the growth rate in deposits nationally by type. Of special note is the rapid increase in jumbo CDs both in the past year and the last three years. Several factors would seem to explain this phenomenon.
- Clearly, the large increase in jumbo CDs reflects the increased use of brokered CDs by banks recently. Likewise, many investors may have reduced their exposure to or exited completely the stock markets and asked their broker to find the best rates available.
- These same investors have shopped for the highest yield until they feel comfortable again in the equity markets.
- Of special note is the decline in demand and checkable deposits in 2005. This would seem to suggest that these accounts may be more rate sensitive than in the past or are an indication that there is less liquidity available for depositors to spend or invest.
- This would be consistent with the concern expressed by many economists about low U.S. savings rates. Does this also mean that there will be more pressure on rates to attract capital both here and overseas? Time will tell.
That begs the obvious question, "What is a banker to do?"
Obviously, grow deposits and control expenses. However, it is tough out there just now and that means you will need to run faster than the other guy to maintain or increase your share of deposits.
Let's consider a few questions:
- Should banks consider building new branches or buying existing ones?
The answer is yes. Surprisingly, the number of bank branches has grown very slowly in the past decade from 80,992 in 1995 to 92,046 in 2005, or a CAGR of 1.3%. However, the increase in de novo banks and the success of Commerce Bank in this period clearly indicate that well-placed and designed branches are a source of low-cost core deposits and value creation for the bank. More than one of the Elite banks has built or bought branches in adjacent communities where growth is more attractive than their traditional local markets. So like the bear, go over the mountain and see what you can see.
- Should banks use their Web sites to attract deposits?
Most certainly, you should. Many times, when we analyze a bank for the first time, we review the Web site to see if it is user friendly and up to date and advertises the bank's current deposit or loan specials. A more effective way than brokered CDs to attract the rate shopper is to make sure your Web site is current and encourages the shopper to take the next step. Oftentimes, the ease of completing a transaction will be worth giving up a few points in yield. You do not have to offer the best rate to be the most attractive offer available.
- Should banks pay local professionals for deposit referrals?
We recently visited one bank that identified a group of lawyers and accountants in their market who had large practices. They appointed them to a committee and paid them a modest flat fee to serve on the committee. They entertain them once a quarter to get their advice about steps the bank is taking, but most importantly, they expect them to refer potential depositors to the bank. At each meeting, they report the progress made for both loans and deposits. They even make special mention of the top "producers" at these meetings.
Peter Drucker observed many years ago that the role of the CFO was to know where the cash is. We believe that the role of a good banker is to know where the deposits are and how to get them. If a bank is to satisfy all its stakeholders, including shareholders, customers, and employees, it must have a regular flow of deposits. Now more than ever, keep your eye on the doughnut and get those deposits.