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JPMorgan Tells Banks to Partner Up as U.S. Deposit Drain Looms
by Matthew Monks
Matthew Monks
May 8, 2017, 7:38 PM EDT
Crunch may be felt this December as Fed’s policy reverses
Midsize-bank deals already underway in quest for deposits
JPMorgan Chase & Co. has some advice for regional banks: A deposit
drain is coming, so merge while you can.
The company’s investment bankers are warning depository clients that they
may begin feeling the crunch in December, thanks to a byproduct of how
the U.S. Federal Reservepropped up the economy after the financial
crisis, according to a copy of a confidential presentation obtained by
Bloomberg News and confirmed by a JPMorgan spokesman.
JPMorgan argues that some midsize U.S. banks -- those with $50 billion in
assets or less -- could face a funding problem in coming years as the Fed
goes about shrinking its massive balance sheet, according to the 19-page
report the New York-based bank has begun sharing with clients.
The Fed’s bond-buying spree from 2009 to 2014, dubbed quantitative easing,
inadvertently left the industry flush with deposits. Investors took money
they got selling mortgage-backed bonds and Treasury securities to the Fed
and parked it in U.S. retail and commercial bank accounts.
This created some $2.5 trillion in excess bank deposits, according to
JPMorgan. It estimates that 60 percent, or $1.5 trillion, of that money will
trickle out of banks in the next four to five years if the Fed follows
through with recent guidance and begins reversing quantitative easing in
December.
The Fed is currently holding about $4.5 trillion of securities. The way it
will get rid of them is by letting them mature and not buying new ones.
Deposit ‘Destroyed’
JPMorgan’s presentation, titled "Core Deposits Strike Back" illustrates how
this process will sap bank deposits using the example of a couple who pays
off a mortgage that was bundled with other mortgages and sold to the Fed.
Right now, when that couple takes that money out of their bank account for
that payment, the Fed uses that cash to buy another mortgage bond, recycling
it back into the banking system.
A "deposit is destroyed" if the "Fed does not reinvest," the presentation
states.
JPMorgan estimates that a quantitative easing-related deposit-drain could
result in loan growth lagging deposit growth by $200 billion to $300 billion
a year.
That could be particularly problematic for banks that rely on deposit
products that tend to roll over swiftly, such as brokered accounts bought
from third parties, large commercial banking accounts and high-interest
savings accounts for wealthy customers.
Retail Dash
It may also set off a dash for retail deposits, a classification that
includes bread-and-butter checking accounts, which banks love because they
are especially cheap and stable.
Midsize banks will have an especially hard time growing retail deposits by
ramping up advertising and investing in branches, according to JPMorgan’s
presentation. That’s because they lack the marketing muscle of mega banks
such as JPMorgan itself, as well as Wells Fargo & Co., Citigroup Inc., and
160;Bank of America Corp. JPMorgan, like some other banks, offers
depositors cash incentives for opening new checking and savings accounts
with five-figure balances.
About 42 percent, or $1.6 trillion, of the new deposits that U.S. banks have
amassed since late 2009 have gone to lenders with at least $1 trillion in
assets, according to data JPMorgan compiled from regulatory filings and SNL
Financial.
“Large banks are making sizable investments in brand, customer acquisition
and technology leading to market share gains,” according to the report.
Since big banks have the wherewithal to hold onto those gains, smaller ones
may have to consider selling or buying rivals to bulk up on retail deposits,
JPMorgan argues.
Consolidation Driver
“The need for retail deposits to fund loan growth, the challenge of
organically originating new relationships and the scale required to support
technology and brand investments will drive consolidation,” the report
states.
A looming push for retail customers may already be spurring dealmaking,
JPMorgan says, noting that a handful of bank mergers have involved targets
with heavy concentrations of deposits purchased from brokers or acquired
through listing services such as QwickRate, both of which are more expensive
funding sources than retail accounts.
The examples include BNC Bancorp’s $2 billion sale to Pinnacle
Financial Partners Inc.and PrivateBancorp Inc.’s roughly $5 billion
agreement to sell to Canadian Imperial Bank of Commerce.
The median for deposits in the form of brokered and listing-service accounts
for U.S. banks with at lease $1 billion in assets was 2.5 percent at the
end of 2016, according to data from SNL Financial. Those types of funds
accounted for more than 20 percent of deposits at BNC Bancorp and
PrivateBancorp, according to regulatory filings.
BNC Bancorp
Deposit needs factored into both banks decision’ to seek a partner.
Selling to Pinnacle is “an excellent opportunity to really drive some
really, serious, dynamic deposit growth to fund this machine over the next
several years,” BNC Bancorp Chief Executive Officer Richard Callicutt
said in a conference call with analysts in January.
PrivateBancorp urged investors to vote in favor of its deal with CIBC in a
shareholder presentation last month to help “address standalone funding
constraints” by giving it access to a large retail deposit base.
Selling to CIBC will help PrivateBancorp when interest rates rise, Terry
McEvoy, a Stephens Inc. bank analyst, said Monday in a research note to
clients.
“We have long felt the company needed to improve their funding base to
support loan growth,” McEvoy said in the note. “To do so on a standalone
basis would be expensive and difficult.”
Proxy firm Institutional Shareholders Services Inc. has advised
PrivateBancorp stockholders to reject the deal because it undervalues the
Chicago-based lender. A shareholder vote is schedule for Friday.
by Matthew Monks
Matthew Monks
May 8, 2017, 7:38 PM EDT
Crunch may be felt this December as Fed’s policy reverses
Midsize-bank deals already underway in quest for deposits
JPMorgan Chase & Co. has some advice for regional banks: A deposit
drain is coming, so merge while you can.
The company’s investment bankers are warning depository clients that they
may begin feeling the crunch in December, thanks to a byproduct of how
the U.S. Federal Reservepropped up the economy after the financial
crisis, according to a copy of a confidential presentation obtained by
Bloomberg News and confirmed by a JPMorgan spokesman.
JPMorgan argues that some midsize U.S. banks -- those with $50 billion in
assets or less -- could face a funding problem in coming years as the Fed
goes about shrinking its massive balance sheet, according to the 19-page
report the New York-based bank has begun sharing with clients.
The Fed’s bond-buying spree from 2009 to 2014, dubbed quantitative easing,
inadvertently left the industry flush with deposits. Investors took money
they got selling mortgage-backed bonds and Treasury securities to the Fed
and parked it in U.S. retail and commercial bank accounts.
This created some $2.5 trillion in excess bank deposits, according to
JPMorgan. It estimates that 60 percent, or $1.5 trillion, of that money will
trickle out of banks in the next four to five years if the Fed follows
through with recent guidance and begins reversing quantitative easing in
December.
The Fed is currently holding about $4.5 trillion of securities. The way it
will get rid of them is by letting them mature and not buying new ones.
Deposit ‘Destroyed’
JPMorgan’s presentation, titled "Core Deposits Strike Back" illustrates how
this process will sap bank deposits using the example of a couple who pays
off a mortgage that was bundled with other mortgages and sold to the Fed.
Right now, when that couple takes that money out of their bank account for
that payment, the Fed uses that cash to buy another mortgage bond, recycling
it back into the banking system.
A "deposit is destroyed" if the "Fed does not reinvest," the presentation
states.
JPMorgan estimates that a quantitative easing-related deposit-drain could
result in loan growth lagging deposit growth by $200 billion to $300 billion
a year.
That could be particularly problematic for banks that rely on deposit
products that tend to roll over swiftly, such as brokered accounts bought
from third parties, large commercial banking accounts and high-interest
savings accounts for wealthy customers.
Retail Dash
It may also set off a dash for retail deposits, a classification that
includes bread-and-butter checking accounts, which banks love because they
are especially cheap and stable.
Midsize banks will have an especially hard time growing retail deposits by
ramping up advertising and investing in branches, according to JPMorgan’s
presentation. That’s because they lack the marketing muscle of mega banks
such as JPMorgan itself, as well as Wells Fargo & Co., Citigroup Inc., and
160;Bank of America Corp. JPMorgan, like some other banks, offers
depositors cash incentives for opening new checking and savings accounts
with five-figure balances.
About 42 percent, or $1.6 trillion, of the new deposits that U.S. banks have
amassed since late 2009 have gone to lenders with at least $1 trillion in
assets, according to data JPMorgan compiled from regulatory filings and SNL
Financial.
“Large banks are making sizable investments in brand, customer acquisition
and technology leading to market share gains,” according to the report.
Since big banks have the wherewithal to hold onto those gains, smaller ones
may have to consider selling or buying rivals to bulk up on retail deposits,
JPMorgan argues.
Consolidation Driver
“The need for retail deposits to fund loan growth, the challenge of
organically originating new relationships and the scale required to support
technology and brand investments will drive consolidation,” the report
states.
A looming push for retail customers may already be spurring dealmaking,
JPMorgan says, noting that a handful of bank mergers have involved targets
with heavy concentrations of deposits purchased from brokers or acquired
through listing services such as QwickRate, both of which are more expensive
funding sources than retail accounts.
The examples include BNC Bancorp’s $2 billion sale to Pinnacle
Financial Partners Inc.and PrivateBancorp Inc.’s roughly $5 billion
agreement to sell to Canadian Imperial Bank of Commerce.
The median for deposits in the form of brokered and listing-service accounts
for U.S. banks with at lease $1 billion in assets was 2.5 percent at the
end of 2016, according to data from SNL Financial. Those types of funds
accounted for more than 20 percent of deposits at BNC Bancorp and
PrivateBancorp, according to regulatory filings.
BNC Bancorp
Deposit needs factored into both banks decision’ to seek a partner.
Selling to Pinnacle is “an excellent opportunity to really drive some
really, serious, dynamic deposit growth to fund this machine over the next
several years,” BNC Bancorp Chief Executive Officer Richard Callicutt
said in a conference call with analysts in January.
PrivateBancorp urged investors to vote in favor of its deal with CIBC in a
shareholder presentation last month to help “address standalone funding
constraints” by giving it access to a large retail deposit base.
Selling to CIBC will help PrivateBancorp when interest rates rise, Terry
McEvoy, a Stephens Inc. bank analyst, said Monday in a research note to
clients.
“We have long felt the company needed to improve their funding base to
support loan growth,” McEvoy said in the note. “To do so on a standalone
basis would be expensive and difficult.”
Proxy firm Institutional Shareholders Services Inc. has advised
PrivateBancorp stockholders to reject the deal because it undervalues the
Chicago-based lender. A shareholder vote is schedule for Friday.
