In a bleak first quarter for profits in general and credit quality in particular, deposits were a relative bright spot.
Many banks' deposits increased in the period and they were able to lower the interest rates they paid their customers, which nudged net interest margins higher.
James Abbott, an analyst with Friedman, Billings, Ramsey & Co., called the growth "a strong acceleration," especially next to the "pretty anemic" increases of the previous four quarters.
Deposits rose almost 2% from the fourth quarter among 119 mostly midcap companies Friedman covers. According to KBW Inc.'s Keefe, Bruyette & Woods Inc., big banks' deposits rose even faster. The largest 13 companies KBW follows posted 5% deposit growth, and margins expanded 10 basis points, to 3.29%.
A deeper look does reveal some caveats — the companies' growth rates varied widely, and money market accounts attracted much of the new deposits. While less expensive, these deposit accounts are also harder to retain. "People are shifting into effectively lower-cost money" — lower in cost for bankers — "while they are waiting to figure out how much rates are coming down and in what to invest," said Morgan Stanley analyst Betsy L. Graseck.
Christopher M. Mutascio, a large-cap bank analyst with Stifel, Nicolaus & Co. Inc., said customers with maturing certificates of deposit are "not ready" to buy new ones, "because rates are low. So they are just parking their money in money market accounts and get a somewhat decent rate compared to CDs, and wait to see how it plays out."
The faltering economy might reverse first-quarter deposit growth, he said. "Consumer-driven deposit growth will be hard to come by."
Bankers have been careful not to drop deposit rates as fast as the Federal Reserve Board has lowered interest rates, said Aaron Fine, a partner in retail and business banking of Marsh & McLennan Cos.' Oliver Wyman. The first quarter was "the most competitive pricing environment in some time, with banks pricing well above the [benchmark] interest rates," he said.
"There was a dramatic fall in interest rates," namely the London interbank offered rate, which lowered bankers' funding cost broadly, Mr. Fine said. "But deposit costs, particularly for higher-rate money markets, didn't fall nearly as fast."
Some of the more subtle shifts in the deposit business have not yet developed into trends.
For example, Mark Chancy, SunTrust Banks Inc.'s chief financial officer, said the "majority of the growth is occurring in interest-bearing NOW and money market accounts." But, he said, the Atlanta company saw "early signs of a cyclical shift in commercial client balances out of sweep accounts" into demand deposit accounts.
Mr. Mutascio and Ms. Graseck said there is little evidence of widespread migration into bank deposit accounts from the capital markets and brokerage firms.
"The balances in money market funds are up 42% year over year," Ms. Graseck said. Bank deposits "grow obviously much slower than that." Said Mr. Mutascio, "If the equity market continues to do fairly well, you could see money flow out of banks."
Kevin T. Kabat, Fifth Third Bancorp's chief executive officer, said in an interview last month that customers were leaning more toward companies they perceive as stable.
"What we did see unquestionably is a flight to quality," Mr. Kabat said. "We are taking share. There is a lot of stress in a lot of competitors, not just the big folks, but even the small folks."
Fifth Third's no-interest demand deposits fell 1% on average from the fourth quarter, and big-ticket CDs fell 12%. But balances rose 3% in savings accounts and 8% in money market accounts. Overall, deposits rose 3.4%, to $97.6 billion.
Mr. Fine said there was not a vast migration to banks considered stable, but some customers are "looking at their bank saying, 'Wait a minute, Is this a bank that's risk-free?' On the whole, mortgage lenders are perceived to be more risky."
Mr. Abbott said the deposit shift toward banks customers sees as more stable is likely to continue.
According to Mr. Mutascio, Fifth Third and Wachovia Corp. were among the companies with the best core deposit growth, and Ms. Graseck added SunTrust to that list. Analysts conceded, though, that exact comparisons are difficult given varying practices among banks for breaking down core deposits.
Bank of America Corp.'s deposits overall rose 0.8% on average from the fourth quarter, to $787.6 billion. But its no-interest deposits rose 1.9%, to $179.8 billion. Among the 10 companies Mr. Mutascio follows, the $1.7 trillion-asset B of A "grew non-interest-bearing deposits the most," he said. And those are the "best core deposits," he said.
Kenneth D. Lewis, B of A's chairman and CEO, said during a conference call with analysts last month, "There was evidence in the fourth quarter that we were beginning to regain some traction in the retail deposit growth after several quarters of sluggish results, and this evidence became more pronounced in the first quarter."
National City Corp. was among those that lost deposits. Nat City executives blamed a decline in mortgage-related escrow deposits and a seasonal decline in commercial deposits.
The Cleveland company's core deposits grew, however, with money market deposits rising 2.9%, to $38.8 billion. Overall its deposits fell 0.7% on average from the fourth quarter, to $97.6 billion.
