Regionals pick their battlefields in fight for deposits

The deposit war is on among big banks, and their tactics for fighting it vary widely.

Some banks are building smartphone apps to lower the cost of deposit-gathering, like PNC Financial Services Group in Pittsburgh, and building distinctly branded national digital banks, like Citizens Financial Group in Providence, R.I.

Others — such as KeyCorp in Cleveland, Fifth Third Bancorp in Cincinnati or Signature Bank in New York — would prefer to be less reliant on digital banking and use other strategies to add deposits.

What they all agree on is that large and regional banks have finally been forced to pay up for retail deposits, after lagging the rest of the industry for months. Deposits are the cheapest source of fuel for loan growth, but the cost to get and keep them is soaring as the Federal Reserve raises interest rates.

“As we are in a year like this one year, where the pace of rate hikes has picked up, that puts more upward pressure on betas,” Allison Dukes, chief financial officer at the $202 billion-asset SunTrust Banks, said at the Barclays Global Financial Services Conference in New York on Wednesday. Dukes referred to deposit betas, the industry’s method of measuring the rate of deposit cost increases.

Online-only banks have especially pushed the envelope. The $147 billion-asset Ally Bank, for example, pays 2.5% on a 12-month certificate of deposit. Traditional players are paying less; the average annual percentage yield on one-year CDs was 0.75% at banks and 0.92% at credit unions in June, according to MagnifyMoney.com.

Large banks waited as long as they could before paying higher deposit rates, and they still don’t match the likes of Ally, Synchrony Financial and others.

Citigroup’s “betas actually in the first half of the year were much lower than what we had expected them to be,” Chief Financial Officer John Gerspach said at the conference. “But, clearly, our expectation is that those retail deposit betas will be increasing in the second half of the year.”

Traditional banks’ catch-up has driven up overall deposit costs, according to Novantas. Total deposit balances held in CDs rose 15.3% between July 2017 and June of this year. That far outpaced deposits in checking and savings accounts.

CDs typically cost a bank more than other types of interest-bearing deposit products.

“Materially all of the retail deposit growth at this point [is] coming in CDs,” Adam Stockton, a director at Novantas, said in an interview. “Sitting out of CDs entirely may mean very low, potentially even flat or negative overall retail deposit growth.”

The $369 billion-asset PNC has determined that one of the best ways to fuel its loan growth is to collect deposits on a national scale through digital banking, and to lessen its dependence on retail branches for deposits, Chairman and CEO Bill Demchak said at the conference. Thus, PNC is offering high-yield savings accounts through its digital bank.

“Yes, the deposit costs are higher, but the cost to produce them is much lower than having bricks and mortar surrounding it,” Demchak said.

“We have an ability to go national with a thin branch network as we thin out our existing network and bring out this existing offering,” he said.

And the $155 billion-asset Citizens has seen rewards from its digital bank, Citizens Access, which launched this summer. It has thus far netted about $800 million in new deposits, Chairman and CEO Bruce Van Saun said.

“It is cost-effective for us to do that, and we can substitute growth in the direct bank for some of the higher-cost sources of deposits,” such as high-net-worth consumers or large commercial deposits, he said.

The $141 billion-asset Fifth Third is going about things differently.It said in July that it is opening 100 to 125 branches in fast-growing markets across the Southeast, shedding roughly the same number in the Midwest and investing in its digital capabilities. However, it has stopped short of trying to build a national digital bank like PNC, Citizens and others.

Ongoing investments in data analytics have allowed it to offer more targeted promotions to prospective households and businesses, Fifth Third has said.

“Some of our marketing analytics is driving tremendous outcomes in the area of household growth and deposits,” CEO Greg Carmichael said at the conference. “The branch openings will be in markets with better deposit growth trends, higher expected population growth, and greater market vitality.”

Pursuing a national digital operation is not justifiable right now, he said.

“At this point, to go outside of our market for … hot money type of deposits and then pay up for it — it doesn't make sense for Fifth Third,” Carmichael said.

Ditto for the $138 billion-asset KeyCorp. It likely will not introduce a digital-only bank, Chairman and CEO Beth Mooney said. Instead, KeyCorp has built out its commercial mortgage servicing business, which has added about $6 billion in escrow deposits.

“That is a source of funding that many banks don’t have,” Mooney said.

Signature is also taking a different tack. The $45 billion-asset bank has seen significant loan growth from the new commercial customers it has obtained from its West Coast expansion, CEO Joseph DePaolo said at the conference.

“If we can grow to $200 million to $300 million in deposits per year [on the West Coast] … that would certainly be beneficial to the overall franchise,” DePaolo said.

Earlier this month, Signature hired private bankers from Wells Fargo and Union Bank for its San Francisco office.

No matter how they go about raising deposit rates and maintaining deposit growth, it’s going to cost banks — and that will be evident in margins.

SunTrust acknowledged as much when Dukes said that quarter-over-quarter growth in its net interest margin will be at the low end of its previous guidance. During its last earnings presentation, SunTrust said the margin would be flat or rise by 2 basis points.

What’s the issue? “The continued pressure on funding costs and just rising deposit costs,” Dukes said.