One of the basic functions of banking gathering deposits has taken on added importance.
From Comerica (CMA) to First Republic Bank (FRC), executives have been preaching the necessity of collecting deposits. The reasons are upcoming liquidity rules and anticipation of higher interest rates. Banks want to lock down as many low-rate deposits as possible before they become more expensive.
The situation has some bankers in a boastful frame of mind. Karen Parkhill, vice chairman and chief financial officer at the $65 billion-asset Comerica in Dallas, touted her bank's high proportion of deposits that carry either rock-bottom, or nonexistent rates.
"We have the highest proportion of non-interest-bearing deposits among our peers, which contributes to us having the lowest deposit costs in our peer group," Parkhill said Feb. 11 at the Credit Suisse Financial Services Forum in Boca Raton, Fla.
"The value of our deposit base is expected to increase significantly," Parkhill says.
Other banks are scrambling to pad their deposits, data show. Deposit growth was stagnant in early 2013, and even contracted at one point. Total deposits, both domestic and foreign, for all institutions insured by the Federal Deposit Insurance Corp. rose a meager 0.01% from the fourth quarter of 2012 to the first quarter of 2013; they fell 0.36% from the first quarter to the second quarter last year.
Things then started to pick up, Deposits rose 2.29% from the second quarter to third quarter, to $11.03 trillion.
The combined effect of Basel III regulations and the gradually improving economy will force banks to raise rates on certificates of deposits and other deposit products in order to compete, says Dan Geller, executive vice president at Market Rates Insight in San Anselmo, Calif.
The national average for interest rates on 12-month, $10,000 CDs stood at 0.31% as of Feb. 14, according to Informa Research Services. That equates to just $310 of interest paid over a year.
Regulators' proposed Liquidity Coverage Ratio, which is considered equivalent to the Basel Committee on Banking Supervision's standards, isn't final and industry trade groups are protesting it. But the proposed rule, which is intended to force banks to hold adequate liquidity in the event of another financial crisis, is already pushing banks to act.
Banks will likely need "one month's worth of liquidity under stress scenarios," which is prompting banks to create models of likely deposit runoff, says Sameer Gokhale, an analyst at Janney Montgomery Scott.
"The banks are clearly looking at the last cycle and the Great Recession, to get a sense of the worst-case scenario for what could happen," Gokhale says.
"It's hard to imagine a repeat of what we saw in 2008 and everyone is so on guard for it," says Jeff Davis, a managing director at Mercer Capital. "The Basel rules are an attempt to institutionalize a better firewall, and part of that protection is having more core deposit funding."
Jim Herbert, chairman and chief executive of First Republic (FRC) in San Francisco, said on Dec. 10 that the $42 billion-asset company won't be affected by the Liquidity Coverage Ratio until at least the end of 2015. "But that will cause us to increase our liquidity holdings" before then, Herbert said at a Goldman Sachs conference.
Banks like Comerica that have already locked in low-rate deposits have a "huge competitive advantage" under those models, Gokhale says. Comerica will be able to earn a wider spread when rates rise, and they're better prepared for the new liquidity rules, he says.
Deposits are also having an effect on dealmaking. The $1.7 billion-asset Center Bancorp (CNBC), in Union, N.J., last month agreed to acquire $1.24 billion-asset ConnectOne Bancorp (CNOB), in Englewood Cliffs, N.J. The combination's benefit is seen in the pairing of a bank with a glut of deposits, Center, with one that has had huge loan growth, ConnectOne.
The $14.1 billion-asset PrivateBancorp (PVTB) also may seek to bulk up in deposits through deals. PrivateBancorp is expected to do well when the economy rebounds, because of its low-cost deposit base. But the Chicago company is trying to add retail deposits now, in an attempt to keep deposit pricing low.
PrivateBancorp is considering acquisitions to help it add retail deposits, Larry Richman, president and CEO, told American Banker this month.
"We have a good deposit base and I'm proud of what we've built, but I would like more granularity in it," Richman said.
As much as anything, banks want to take advantage of the fact they can reel in customers now at a much lower cost than will be possible in the next year or so, when rates rise, Geller says.
"That's the ultimate scenario for banks, to lock in current rates for the long term," says Geller of Market Rates Insight. "If they are able to lock in balances at the current rates, they will gain from having a very low cost of funds, which will allow them to be even more competitive" when loan demand picks up.
Andy Peters writes about regional banks and community banks for American Banker.
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