ore deposits are a vital source of stable funding that enables banks to make profitable loans. Banks can—and do—rely on more volatile sources of funds like CDs, money market accounts and brokered deposits, but this tends to be hot money that always chases the highest interest rate. "[Core deposits are] really the backbone of the organization. It’s what gives you permission to keep lending and not get in trouble from a liquidity standpoint,” says Roxanne Emmerich, chief executive officer of The Emmerich Group, a consulting firm in Bloomington, Minnesota. Core deposits are generated within the bank’s core markets— hence the name—and are usually in the form of checking and savings accounts. How “sticky” these core deposits are can serve as a good measure of customer loyalty.
The banks with the best core deposit growth strategies exhibit core deposit growth while at the same time effectively managing their cost of funds. To determine which bank of the 10 largest retail banks in the U.S. has the best core deposit growth strategy, Bank Director examined core deposit growth, core deposit makeup and funding costs. Bank Director also surveyed industry experts.
BB&T Corp. demonstrated the highest level of core deposit growth in our ranking while also maintaining a low cost of funds.
Much of that core deposit growth came through BB&T’s acquisitions: National Penn Bancshares, in 2016, and Susquehanna Bancshares and Bank of Kentucky, in 2015. BB&T Chief Executive Kelly King sees a correlation between a strong core deposit base and profitability. “We are really, really focused on revenue growth,” said King in a June 2017 earnings call. He noted the bank’s efforts to grow core loans, in addition to other revenue strategies. “We are focusing intensely on our margin. We believe we will continue to have low betas. The main reason for that is because we have a really solid core deposit base,” he said. Deposit betas measure changes in a bank’s deposit rates relative to interest rate changes. A low beta indicates greater stability. "We’re simply replacing more expensive, less coreoriented deposits with noninterest-bearing free deposits, and that seems like a rational thing to do," said King.
“They know the importance of core deposits,” says Brian Klock, managing director at Keefe Bruyette & Woods. “One of the things that they’re so successful at is integrating deals. They’re good at retaining those deposits once an acquisition is closed.”
With one exception, the banks that performed best in core deposit growth are large regional banks. Wells Fargo & Co., despite its scandal, came in second in the category. As detailed in the best branch network category, Wells Fargo has still managed to grow deposits, particularly among the bank’s loyal customers who have chosen to stay despite its recent scandals.
Like BB&T, core deposits at PNC Financial Services Group make up the vast majority of the company’s total deposits, but core deposit growth has been lower than most of the 10 largest retail banks. PNC does, however, maintain a low cost of funds and generates a good level of fee income from its deposits. PNC has been moving away from promotional rates in its money market product and still
held on to the majority of those deposits, CEO Bill Demchak said in the bank’s first quarter 2017 earnings call.
SunTrust Banks, at fourth, comes in at the middle of the pack for many of the metrics, but has the lowest cost of funds, at 0.33 percent. "I think the reason that their cost of funds is so low is because they’re very flush with funds, have been for several years now and in a lot of respects, they have big market share," says Chris Marinac, director of research at FIG Partners. "They’ve got in my opinion real pricing power that didn’t really exist before the last cycle."
Despite demonstrating the second-highest level of core deposit growth, behind BB&T, TD Bank (U.S.) doesn’t perform as well based on the funding cost metrics, coming in at fifth in the category. At sixth, U.S. Bancorp performs relatively well across the board, but doesn’t excel in any one particular metric.
With the exception of Wells Fargo, the largest U.S. retail banks rank at the bottom for core deposits, with JPMorgan Chase & Co. at seventh, Bank of America Corp. at eighth and Citigroup at tenth. Despite a high net interest margin, at 6.13 percent at the end of 2016, Capital One Financial Corp. also scored low in the category, coming in at ninth.
All four ranked in the bottom half for core deposit growth, but JPMorgan and Bank of America are growing organically from a larger base, making it difficult to generate a high level of growth. All four exhibited the highest cost of funds and a low level of fee income from deposits as a percentage of the bank’s net income. Citi, Capital One and JPMorgan also scored near the bottom for holding a low percentage of core deposits relative to total deposits, at 41 percent, 77 percent and 78 percent, respectively. Bank of America and JPMorgan also have lower net interest margins compared to their peers.
How They Ranked
|SCORE||CORE DEPOSIT GROWTH, YE 2014-2016||COST OF FUNDS, YE 2016|
|2||Wells Fargo & Co.||3.33||15.23%||0.37%|
|3||PNC Financial Services Group||4.20||9.72%||0.41%|
|5||TD Bank (U.S.)||5.13||19.82%||0.49%|
|7||JPMorgan Chase & Co.||5.40||11.57%||0.52%|
|8||Bank of America Corp.||5.93||10.15%||0.60%|
|9||Capital One Financial Corp.||7.93||6.50%||0.72%|
Did You Know?
he nation’s banks are chasing a small corner of the market when it comes to building core deposits.
Core deposit growth can be a challenge, says Mary Beth Sullivan, managing partner at Capital Performance Group in Washington, D.C., because they have to be grown by stealing a customer from another organization. And in this game, scale and marketing power can be a big advantage. "I don’t count out the big banks and their ability to compete very effectively through pricing incentives for consumer deposits," says Sullivan.
As an example, Bank of America Corp. rewards customers on a tiered basis of $20,000, $50,000 and $100,000 in combined deposits and Merrill Lynch investment accounts. More money held at Bank of America yields greater rewards in the form of a higher rate on a money market savings account, fee waivers on deposit products, bonus points on eligible Bank of America credit cards, free trades through the bank’s Merrill Edge online brokerage, interest rate discounts on auto loans and reductions in mortgage origination fees.
“We want to drive new deposits, and we want to bring in new customers to the bank through this [rewards] program,” Jason Gaughan, a Bank of America executive, told Bankrate.com in August 2017. Chief Financial Officer Paul Donofrio reported in the bank’s fourth quarter 2016 earnings call that 1.2 million customers enrolled in the program in 2016.
The retail banks studied by Bank Director for this ranking, along with regional and community banks and credit unions, are all fighting to win over a small percentage of consumer business. The consulting firm Raddon reports that just 15 percent of households hold a deposit balance in excess of $25,000. This small group of “high-balance savers” typically accounts for 85 percent of a financial institution’s deposits.
For more affluent customers with a combined $200,000 or more in deposits, retirement and investment accounts, Citigroup’s Citigold package provides a relationship manager, a financial advisor, one-onone financial guidance, and rewards and preferred rates on deposit products. Citigold members can also access an exclusive app that includes several biometric login options, online trading and a “click to call” function to reach the customer’s relationship manager or financial advisor. There is no monthly fee for the service.
Citigold is considered a wealth management product rather than a deposit product, but it combines deposit accounts, investment assets and other Citi products to provide a fuller understanding of the customer, said Citi CFO John Gerspach in the company’s second quarter 2017 earnings call.
What about the 85 percent of households that account for just 15 percent of deposits at most large banks? How are banks serving those customers profitably? True free checking has gone the way of the dodo at most financial institutions, including the biggest banks. Instead, banks are requiring customers to hold a minimum average checking balance to waive the monthly account fee, a minimum dollar value in direct deposits or a minimum number of debit card transactions. JPMorgan Chase & Co. waives a monthly $25 fee on an interest-bearing checking account if the customer makes automatic payments on a Chase mortgage via the checking account. U.S. Bancorp, which offers its own program for high-balance customers at $25,000 in combined deposits, investments and credit balances, allows customers with lower balances to waive checking account fees with a personal loan, line of credit or credit card with the bank.
These behaviors benefit both the bank and the customer. "Free checking basically is a marketing strategy to get someone to go online or go in the branch to check out everything that [the bank has] and then put [the customer] in an account that has more inherent profitability, either on a stand-alone basis or on a potential cross-sell basis," says Mike Branton, managing partner at StrategyCorps, a technology provider for the financial services industry.
As a general rule, large retail banks have an edge in attracting more affluent customers compared to community banks through their ability to offer more dynamic digital offerings and a broader suite of products that are attractive to this segment, particularly investment and trust services, says Branton. As interest rates gradually rise, tying checking account relationships to other products or rewarded behaviors makes it less likely that customers will leave in pursuit of a slightly higher rate.