Banks See Margins Widen by Deposits Surging to Most Since 1990s

Discussion in 'Wall St. News' started by ASusilovic, Nov 30, 2010.

  1. Nov. 30 (Bloomberg) -- Profit margins at U.S. banks may get a boost from increasing deposits as customers show a preference for immediate access to their money and less appetite for risk with interest rates at a record low and the economy still seeking a bounce from recession.

    Commercial banks in the U.S. added $88.9 billion of so- called core deposits in the third quarter, bringing the total to $6 trillion, the most since at least 1992, according to the Federal Deposit Insurance Corp. Wells Fargo & Co., the fourth- largest lender by deposits and fifth-ranked U.S. Bancorp have said they’re competing for such funds, which include checking and savings accounts and time deposits of less than $100,000.

    Banks are relying more on deposits for funding after a freeze in credit markets sparked the financial crisis and led to the bankruptcy of Lehman Brothers Holdings Inc. in September 2008. The industry must shift from raising funds in debt and securitization markets to increasing core deposits, which pay little or no interest, analysts say. The average rate of 0.80 percent on bank deposits is the lowest since at least 2000, according to Market Rates Insight in San Anselmo, California.

    “Other sources of funding are drying up,” said Christopher Whalen, a former Federal Reserve analyst and co- founder of Institutional Risk Analytics in Torrance, California. “The banks that have stable funding will inherit the earth.”

    Shrinking Leverage

    Banks consider core deposits more dependable in times of stress since customers with checking and savings accounts are more likely to keep their money in the bank than bond investors or lenders. Lehman and business lender CIT Group Inc., financial companies more reliant on credit markets, filed for bankruptcy when their traditional sources of funding vanished.

    Borrowing by U.S. commercial banks fell 17 percent since July of last year, while deposits, excluding large time deposits, increased 9 percent in the same period, according to the Fed. About two-thirds of the core deposits added by banks in the third quarter, or $59.4 billion, were deposits that don’t pay interest, according to the FDIC.


    “I have instructed our team to be aggressive on deposit gathering,” Richard Davis, chief executive officer of U.S. Bancorp, said on the company’s earnings call Oct. 20. Whichever bank “goes into the recovery with the most customers -- with the most deposits, especially core deposits -- will end up winning the next cycle. So, we’re not backing down.”