Facing an increasingly competitive rate environment, U.S. banks say they have managed to keep deposits in-house even as customer funds migrate to higher-yielding options.
It has been three years since the Federal Open Market Committee began its latest round of tightening. It raised the Fed funds target range nine times — including four times in 2018 — to bring the range to a current 2.25% to 2.5%. Over that time, many banks have seen deposits shift out of noninterest-bearing accounts into interest-bearing ones, or they have raised rates on select accounts to keep customers happy.
Interest rate increases and deposit shifts have led to higher cost of funds across the banking industry. The cost of interest-bearing transaction accounts was 1.47% for the industry in the fourth quarter of 2018, up from 1.25% in the prior quarter and 22 basis points in the fourth quarter of 2015, according to S&P Global Market Intelligence data.
As they deal with shifts in deposit mix and the subsequent creep of deposit betas, bank executives have highlighted their ability to keep those funds in-house.
"Even though rates and betas on off-balance sheet products have been higher, we haven't seen a mass exodus of deposits," said Chrystal Pozin, director of commercial deposits and pricing at Novantas, a bank analytics and advisory company. "It's mostly staying on-balance sheet."
Deposit retention following a mix shift is a notable trend with traditional banks. These funds include retail deposits, which are facing increasing competition from online and direct banks that use high interest rates to attract funds. At Citigroup Inc., money moving into investments during the fourth quarter of 2018 eroded average deposit growth year over year, CFO John Gerspach said. S&P Global Market Intelligence data shows that Citi's demand and NOW deposits grew 3.30 percentage points year over year in the fourth quarter.
Most of the mix shift happened in U.S. retail deposits, which make up the bulk of Citi's noninterest-bearing funds. Gerspach said these funds have moved into interest-bearing accounts or investments; the retention rate of funds moving into investment accounts improved to 75% in the second half of the year.
Direct banks that offer high rates posted double-digit increases in deposits year over year, outpacing growth at the country's biggest banks. Synchrony Financial grew its deposits by 15.4% year over year in the fourth quarter of 2018, and digital peers Discover Financial Services and Ally Financial Inc. both grew deposits by more than 13.9%.
On the corporate side, JPMorgan Chase & Co. CFO Marianne Lake said the bank is retaining a "significant portion" of wholesale nonoperating deposits that moved into higher-yielding alternatives. The company's demand and NOW deposits fell 0.84 percentage points in the fourth quarter of 2018 compared to a year ago.
One product banks can use to retain customers seeking greater return on their deposits is interest-bearing checking. Novantas' Pozin said banks can now pay interest on checking for corporate customers following a regulatory change in 2011. The ability to offer interest-bearing checking means some account types could show no reduction in mix but shift from noninterest-bearing to interest-bearing and ultimately increase costs.
Checking accounts have been an area of focus at Bank of America Corp. for years even as the company deals with shifts and rate increases in its Global Banking and Global Wealth and Investment management divisions, said CFO Paul Donofrio. Demand, NOW and other transaction account deposits have grown 3.25 percentage points at Bank of America over the last three years, according to S&P Global Market Intelligence data. They grew 3.10 percentage points in the fourth quarter compared to a year ago.
Bank of America saw growth in its noninterest-bearing and low-interest checking accounts in the consumer banking division, which Donofrio said make up more than half of total consumer banking deposits. He highlighted Bank of America account features like mobile and online banking products, branch network and rewards that have provided value to customers while allowing the bank to keep retail accounts rates flat.
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