Regional Banks Fight for Deposit Growth
Deposits are a critical component of the traditional banking equation. Banks with a sizeable deposit base can extend lower margin loans or can increase returns on existing loans. A regular review of public deposit data is an important part of the BRD Insights Series.
Since 2009, total deposits have increased from roughly $9 Trillion to $14.5 Trillion—an average compound growth rate of nearly 5% (Figure 1) which outpaced the US’s average economic growth rate of roughly 4% over the same period (https://fred.stlouisfed.org/series/GDP).
As one might expect, banks did not share in this growth equally. The biggest 4 banks now have fewer acquisitions options per Federal Reserve restrictions, changing their levers for growth. Meanwhile, the biggest deposit growth occurred at regional banks; those with $100-500 Billion in total assets grew deposits by an average of 10% a year for the last 10 years, from $1.5 Trillion to $4.1 Trillion. Meanwhile, banks with < $10 B in total assets have managed to hold on to about $2 Trillion in deposits, however this represents a decreasing share of the deposit market and the number of banks in this category decreases each year.
Figure 1
With deposits as with the rest of banking, the largest banks are playing in a different league. Heading into the last decade, the biggest 4 banks had already secured a 40% share of deposits, bringing them close to the FDIC’s merger limitation whereby an interstate merger would be denied if the new institution “would control more than 10 percent of the total amount of deposits of insured depository institutions in the United States.”[1] Though in practice, this rule really only applies to acquisitions of banks, meaning that the rule only narrows the pool of acquisitions targets, and does nothing to impact organic growth.
At the other end of the spectrum, we have the smallest banks—those with total assets less than or equal to $10 Billion—which have struggled, to say the least. Of the over 7000 banks reporting in this segment in 2009, 33% are no longer reporting as of 2019, due to mergers, acquisitions or failures. Despite the decreasing number of banks in this category, the category has maintained over $2 trillion in deposits. Of course, this means that the category’s market share is shrinking, even if a portion of the market is committed to keeping their dollars in deposits at smaller banks.
Banks in the middle have experienced more disparate changes over the past ten years. The deposit market share for the “super-regionals” ($100 – 500 B total assets) grew from 17% to 29%. And while the “mini-regionals” ($50 – 100 B total assets) lost share, banks with $10 – 50 B in total assets earned deposit market share. Beyond the historic variance here, the future of these banks’ ability to attract low-cost deposits is put into question by new market entrants like Marcus by Goldman Sachs and flashy FinTechs.
Which brings us to the unquantifiable, growing tranches of consumer “deposits” that are not insured by the FDIC. Bitcoin, Venmo, gift card and Starbucks Card balances, for example, are uninsured along with other new financial products and services. We make no attempt to quantify the size of these tranches in this analysis beyond the callout that banks are competing in more spaces for the same deposit dollars. And of course, credit unions do not report to the FDIC so their data is not included here.
If you are reading this, there’s a decent chance you represent a US bank that is captured somewhere in the graphs above. If you work for one of the top 4 banks, you may not be focused on low-cost deposit growth. Otherwise, you ought to ask yourself what your banks’ strategy is for low-cost deposit growth in the decade ahead (see an example of our strategic reviews here). Consider contacting the author or an AQN Sales Representative to discuss deposit growth strategies or to hire AQN to evaluate your strategy.
References:
[1] CHAPTER 16—FEDERAL DEPOSIT INSURANCE CORPORATION § 1831u. Interstate bank mergers(b)(2)(a) – “The responsible agency may not approve an application for an interstate merger transaction if the resulting bank (including all insured depository institutions which are affiliates of the resulting bank), upon consummation of the transaction, would control more than 10 percent of the total amount of deposits of insured depository institutions in the United States.”