Regionals outflanked by big banks in battle for deposits

Regional banks appear to have taken a hit in the opening round of the industrywide battle to gather deposits.

Over the past few days, midsize banks — such as Comerica, Commerce Bancshares and M&T Bank — have reported notable declines in total deposits, with M&T, in particular, reporting a 6% drop from a year earlier.

Executives have offered a number of reasons why, saying during earnings calls that business customers typically draw down cash early in the year to pay for employee bonuses.

Others simply looked on the bright side, saying that a decline in commercial deposits is often a precursor to better loan growth, as businesses use their excess cash to cover business-related investments.

What’s notable, though, is that the decline is distinctly a regional bank problem. The megabanks — with the exception of the embattled Wells Fargo — reported strong deposit growth during the first quarter.

It’s too soon to say, of course, whether the split between regionals and big banks is a momentary blip or a trend in the making. But it nonetheless reflects a working theory about deposit competition that has recently taken hold: Customers may be choosing the banks with the best technology rather than those that offer the best deposit rates.

That theory made an appearance during Comerica’s earnings call Tuesday, when an analyst pressed executives on whether they are spending enough on tech to keep up with their competition.

“Do you think you can compete at this size in the digital age of banking?” Steven Alexopoulos of JPMorgan Securities asked. “Or do you need to add more scale to ramp up that spend?”

President Curtis Farmer responded by pointing out that the $72 billion-asset Comerica recently upgraded client-facing tech in its treasury management business. The Dallas company also last year launched a new mobile app for consumers, and it continues to make a slew of other improvements to its back-end technology, he said.

“Technology today is becoming more ubiquitous,” Farmer said, without providing details on the company’s tech budget. “We have really moved away from heavy customization … to really leveraging key vendor relationships and more cloud-based technology.”

It is unclear whether those investments have been enough to encourage depositors to stay put. During the first quarter, deposits in Comerica’s business banking unit fell 7%, while retail deposits rose 1%. Total deposits fell by just under a percentage point to $57.6 billion.

Questions about the value customers place on slick technology comes as the nation’s biggest banks have made no qualms about hiding the size of their tech budgets.

In the coming year, for instance, JPMorgan Chase expects to spend an additional $1.4 billion on technology, the company said at its annual investor day in February. That investment will fund what executives describe as the company’s “digital everything” model, including mobile-app upgrades and new back-office uses of blockchain.

So far, those investments have coincided with increases in deposits. During the first quarter, total deposits rose 4% overall, and 6% within JPMorgan’s retail bank. Additionally, the number of active mobile customers rose 13%, to about 30 million.

Over the past year, company executives have suggested that splashy investments in tech could give them a leg up in the looming battle for deposits. Customers value nice mobile features in the same way that they value better returns on their savings account.

“Customer experience, investments, the convenience, the brand, the marketing, the digital features ... all become increasingly important and customers are less price sensitive,” Marianne Lake, chief financial officer at JPMorgan, said during the company’s quarterly call on Friday, describing a theory of deposit-price competition that “many people subscribe to.”

Recent research underscores the emerging divide between big and small banks when it comes to deposit-gathering. Between 2011 and 2016, the pace of deposit growth at industry’s three biggest banks — JPMorgan, Bank of America and Wells Fargo — was roughly double the pace at smaller banks, according to Novantas, the retail bank consulting firm.

It remains to be seen whether regional banks will gain momentum in their deposit-gathering if the Fed continues to raise interest rates and the industry begins to compete on price in a meaningful way.

During earnings calls over the past few weeks, banks have said that day is likely just around the corner.

M&T, for instance, has begun having more frequent conversations with business clients about moving excess cash balances into higher-yielding accounts. Additionally, on the retail side of the bank, executives have “just started to see a little bit of a creep” on the local rates offered on 18 month CDs, according to Chief Financial Officer Darren King.

“You can definitely feel things are starting to get a little closer to when we’ll see a turn,” King said during the Buffalo, N.Y., company’s earnings call Monday.

During the first quarter, Comerica boosted deposit rates in “very strategic and targeted” markets in response to upticks in local deposit rates, CFO Muneera Carr said during the company’s earnings call Tuesday. She did not provide additional details.

JPMorgan, meanwhile, expects deposit rates on the retail side of the company to increase at a rapid clip once competition picks up, though Lake said the company has not seen any signs that it will happen soon.

“We haven’t changed our expectations on that, but you know, we haven’t seen it yet, either,” Lake said. “I guess we’ll all know when it finally unfolds.”

Laura Alix contributed to this article.