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Mid-tier banks gain deposit share as money center rivals hold back on growth

The biggest banks' U.S. deposit market share dominance slipped by a few notches as some have moved to fend off a surge of liquidity, and mid-tier banks appear to have picked up some of the slack.

But with pandemic-era dynamics rippling through deposit portfolios, it remains unclear whether the shift will last. Deposit market share decreased at seven of the 10 largest banks by deposits as their growth lagged a 10.6% jump in balances across the industry in the year through June 30. The data is based on the Federal Deposit Insurance Corp.'s latest Summary of Deposits, which was released on Sept. 3.

"We're in a very unusual place right now from a market share perspective," said Adam Stockton, a director at Curinos, a data company for financial institutions. "Almost no banks need the deposits right now. ... Banks are still looking to grow primary relationships but would be very happy in the near term if those primary relationships didn't come with significant deposit volumes."

JPMorgan Chase & Co., PNC Financial Services Group Inc., which acquired BBVA USA Bancshares Inc. for $11.57 billion on June 1, and brokerage firm Charles Schwab Corp., were the only banks among the 10 largest to gain market share. JPMorgan Chase has been one of the banks to discuss efforts to channel clients' excess cash off its balance sheet, and it has issued preferred stock to bolster capital levels as growth brought a key leverage ratio closer to its regulatory minimum.

In aggregate, the Big Four banks' share of deposits dipped to 35.4% from 35.9% the year prior, even as their combined deposit portfolios increased 8.8% to $6.098 trillion. The share of the rest of the top 50 increased to 38.7% from 37.5%, while the share of all other institutions declined to 25.9% from 26.5%.

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Deposit inflows have been massive since the pandemic began, reflecting enormous liquidity injections by the Federal Reserve, higher precautionary cash balances at businesses and household income growth that has outstripped spending after multiple rounds of federal pandemic assistance payments.

While the Summary of Deposits data shows some megabanks lost ground over the last year, a disproportionate amount of the excess liquidity since year-end 2019 gravitated toward the Big Four, with the exception of Wells Fargo & Co., which is subject to a regulatory cap on its asset size. Domestic deposits at BofA's principal bank subsidiary since the end of 2019 increased 33.4% through June 30, ahead of industry aggregate growth of 29.8%. The figure was 48.4% for JPMorgan Chase, though its sequential growth in the second quarter was 1.3%, matching the industrywide figure. The largest banks operate large consumer franchises and are well-positioned to absorb large institutional and corporate deposits.

For the mid-tier banks that have gained ground, the shift can be meaningful. "There's the opportunity for smaller banks to make a dent, and it doesn't take a lot within a particular market to get a little bit more scale," said Christopher McGratty, managing director and head of U.S. bank research for Keefe Bruyette & Woods.

Deposits that have moved from big banks concerned about leverage constraints and pressure on net interest margins has given smaller banks a window to poach clients. Some of the money flowed from national to regional banks, but it is not clear whether the regionals can turn the deposit flow into a long-term relationship, said Peter Serene, also a director at Curinos. Serene said that big banks that have sought to limit account balances have focused on their very biggest customers, and stealing them away is no easy task since the largest banks have a significant advantage in cash management and payments products.

"It's not impossible, but it's a challenging proposition for a regional bank to go in and say, 'We want to parlay having taken $10 million of balances from you into being the primary treasury management bank for a Fortune 500 company,'" Serene said.

The three mid-tier banks with the largest deposit growth in the most recent data — SVB Financial Group, Signature Bank and Western Alliance Bancorp. each posted year-over-year increases of more than 50% and largely employ unique business models and niche focuses. Signature said that more than half of its $11.59 billion of deposit growth in the second quarter, which represented a 15.7% sequential increase, was driven by its cryptocurrency business.

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On the consumer side, Stockton said it is difficult to discern primary relationship trends in top-line deposit figures because of idiosyncratic flows during the pandemic era. He estimated that two-thirds of the increase in household deposits over the last 15 months or so has come from emergency government payments that tended to land in primary checking accounts, favoring banks that already had strong positions in mass-market transaction accounts.

Muted retail deposit growth at banks that rely heavily on time deposits could also reflect deliberate reductions in high-cost funding during an environment of sluggish lending. "Banks that had a really high [certificate of deposit] share a couple of years ago aren't looking like they grew as much because even if they did grow those primary checking deposits, that's been offset to some extent by a greater degree of runoff," Stockton said.

JPMorgan Chase's primary bank subsidiary reported that its household deposits increased 45.6% from the end of 2019 to $813.61 billion at June 30, according to Market Intelligence data. BofA's primary bank subsidiary posted growth of 32.1% over the same time to $1.053 trillion. Both banks have been pruning branch networks to reduce costs, but they have continued to tout the through-the-cycle value of their low-cost deposit franchises and have simultaneously pursued aggressive branch expansion strategies in new markets.

Since it appears likely that it will take some time for lending volume to catch up with deposit growth, Serene said he expects most banks to be focused on competing for primary relationships instead of balances for "several years." Nevertheless, Serene predicted that the coming periods will be "noisy. You're going to see some banks that offer really high rates trying to pick off primary relationships."

On the consumer side, Stockton said he expects more bifurcation. "You may have a bank where they say, 'Great. We grew primary relationships by 5% to 8%. That was really our target this year. It doesn't bother us in the least that our deposits are completely flat,'" he said.

On the other end of the spectrum, if the asset generation picture brightens, online banks — some of which posted year-over-year declines in deposits in the most recent data could "lead the market back up" in terms of deposit pricing once underlying rates start to rise, Stockton said. "It's hard to keep your rates down at zero as your customers are being hit with 1% rates with a high degree of frequency."

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