The Deposit Dilemma - Federal Reserve Bank of Boston€¦ · The Deposit Dilemma Trends,...

The Deposit DilemmaTrends, Challenges, and Responses

Ron AdamsLaura GreeneDon Lambert

Part I: Trends

Trends ● Challenges ● Responses

3

First District trails in deposits


60%

65%

70%

75%

80%

85%

2007200620052004200320022001200019991998

Dep

osits

as

Perc

ent o

f Ass

ets

1st District Community 1st District RegionalNational Community National Regional

Source: FDIC Merger Adjusted Call Report Data

4

5

0%

10%

20%

30%

40%

50%

60%

70%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Liab

ility

as

Perc

ent o

f Ass

ets

Total Deposits Small Time & Savings Deposits Checkable Deposits Large Time Deposits

Commercial banks held steady with jumbo CDs compensating for deposits lost elsewhere


Source: Flow of Funds Data, www.federalreserve.gov

6

0%

10%

20%

30%

40%

50%

60%

70%

80%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Liab

ility

as

Perc

ent o

f Ass

ets


Total deposits at savings institutions fell by 8% since 1995



7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Liab

ility

as

Perc

ent o

f Ass

ets


Credit unions also fell but by a smaller margin



8

Part II: Challenges

• Consumer behavior• Direct banks• Demographics • Local competition


9

10

11

12

13

14

15

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Hous

ehol

d De

bt S

ervi

ce a

s Pe

rcen

t of D

ispo

sibl

e In

com

eHouseholds are borrowing more


Source: www.federalreserve.gov

10

-2

0

2

4

6

8

10

12

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

Pers

onal

Sav

ings

Rat

e as

Pe

rcen

t of D

ispo

sabl

e In

com

eSaving less


Source: National Income and Product Account Tables - Bureau of Economic Analysis (www.bea.gov)

11

And using fewer checks for their purchases

Source: Visa USA Research Services 2006 - Visa Payment Panel Study


12

Part II: Challenges

• Consumer behavior• Direct banks• Demographics• Local competition


13

Direct banks have become a major player in deposit markets


Source: First Manhattan Consulting Group, 2007

14

ING Direct took an early lead

05

101520253035404550

2000 2001 2002 2003 2004 2005 2006

Depo

sits

(bill

ions

)


Source: FDIC Call Report Data

15

Other large banks are now following

0

2

4

6

8

10

12

2005 2006

Depo

sits

(bill

ions

)

Citi Direct HSBC Direct


Source: SEC 10k Reports

16

Their success has attracted non-banks

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006

Depo

sits

(bill

ions

)

State Farm Met Life E*Trade



17

Consumer lenders have also taken note

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006

Depo

sits

(bill

ions

)

Countrywide GMAC



18

Part II: Challenges



19

New England’s population growth is below average

6.268.86United States

2.864.56Vermont1.783.58Rhode Island6.109.47New Hampshire1.922.85Massachusetts3.836.09Maine2.894.44Connecticut

Projected Population Change 2008-2012 (%)

Population Change 2000-2007 (%)

Source: SNL DataSource: Based on 2000 Census Bureau data with Projections provided by ESRI


20

And above average loss of the most productive workers and savers

15.749.8416.8710.2516.1210.0215.3555+ Age Group (%):

-5.12-4.16-0.79-1.97-3.64-2.231.9835-54 Age Group (%):

2.214.327.412.221.985.605.0215-34 Age Group (%):

-1.29-3.551.73-2.950.14-1.653.600-14 Age Group (%):

2.861.786.101.923.832.896.26Total Population:

VTRINHMAMECTUS% Change 2007 - 2012

Source: SNL Datasource based on ESRI projections


21

Part II: Challenges



22

13579

1113151719

2007200620052004200320022001200019991998

Ret

urn

on E

quity

1st District Community 1st District RegionalNational Community National Regional

Banking in New England is highly competitive



23

1444424West North Central

637551West South Central

662678East North Central

767820East South Central

26958Maine1021875Middle Atlantic

171099Connecticut1239958National

151144Vermont13771017Mountain

131287Massachusetts13131021South Atlantic

91935New Hampshire16851036Pacific

23399Rhode Island16371216New England

Rank2006 HHIAverageMedian2006 HHI

New England has some of the most concentrated banking markets in the country


Source: SNL DataSource

24

The intensity of the competition reflected in the pricing of CDs

Jumbo CDs

00.20.40.60.8

11.21.41.61.8

Jun-

97

Jun-

98

Jun-

99

Jun-

00

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06Large BanksCommunity BanksNew England Banks

CDs < $100,000

00.10.20.30.40.50.60.70.80.9

1

Jun-

97

Jun-

98

Jun-

99

Jun-

00

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Large BanksCommunity BanksNew England Banks


Difference in CD rates between banks paying the most and those paying the least

25

Increasing competition in the wholesale market?

12

58 (out)

26

1

NA

Bid (Sep 2006)

JP Morgan Chase

Bank of America

Local Competitor

Sovereign Bank

Citibank

Bidder

5.271%5

5.275%4

5.276%3

5.325%2

5.330%1

RateBid (Sep 2007)


Source: www.bidmass.com

26

Part III: Responses

• Wholesale funding• Branching• Integrated approach


27

Rely on wholesale funding

15

18

21

24

27

30

Sep-04

Nov-04

Jan-0

5Mar-

05May

-05Ju

l-05

Sep-05

Nov-05

Jan-0

6Mar-

06May

-06Ju

l-06

Sep-06

Nov-06

Jan-0

7Mar-

07May

-07N

onco

re F

undi

ng a

s Pe

rcen

t of A

sset

s

1st District Community 1st District Regional


28

-2468

1012141618

F irst DistrictRegional

NationalRegional

F irst DistrictCommunity

NationalCommunity

Lia

bil

ity

as P

erce

nt

of A

sset

s

CDs > $100 Thousand FHLB B orrowings Other B orrowings B rokered Depos its

With a regional preference for the FHLB



29

Part III: Responses



30

Build more branches

• Examined impact of: – Net change in branches– Deposit rates– Changes in personal income– Banking concentration

• New branch associated with a $63.2 million increase in deposits

• New branches come at a cost: average cost in 2006 was over $2.5 million


31

In better locations

30% Execution

47% Location - local retail environment, small business demand, overall site visibility, brand strength of local competition

23% Demographics - household income, household growth, population density

Source: Hal Hopson and Stephen Rymers, 2003


32

Part III: Responses



33Trends ● Challenges ● Responses

Integrate deposit gathering into the entire customer relationship

Deposit Operations/Cash Management

Centralized RelationshipCoordination

Lending

ALM

IT

34

The Deposit Dilemma Dynamic

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2005

2001

1997

1993

1989

1985

1981

1977

1973

1969

1965

1961

1957

1953

1949

1945

1941

1937

Dep

osits

as

Perc

ent o

f Ass

ets

for C

omm

erci

al B

anks


Source: www.fdic.gov

All Presentations are available online at:

www.bos.frb.org/bankersconference2007

36Trends ● Challenges ● Solutions

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2000 2001 2002 2003 2004 2005 2006

Ret

urn

on A

sset

s

STATE FARM BKFSB METLIFE BK NA

E*Trade Bank

COUNTRYWIDEBK FSB DISCOVER BK

GMAC BK

ING Direct

Return on assets of various direct banks

37

ING direct loan growth and ROA

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2000 2001 2002 2003 2004 2005 2006

Retu

rn o

n As

sets

0%5%10%15%20%25%30%35%40%45%

Loan

s to

Ass

ets

38

New verses existing money

Citi Direct

New Money, $7.9

Cannabilized, $2.0

HSBC Direct

New Money, $5.0

Cannabilized, $1.0

39

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0% 2% 4% 6% 8% 10% 12%2006 Growth

10-Y

ear A

vera

ge G

row

th

Banks Thrifts Credit Unions Mutuals

Deposit growth

40

Loan growth

0%

2%

4%

6%

8%

10%

12%

-10% -5% 0% 5% 10% 15%

2006 Growth

10-Y

ear A

vera

ge G

row

th


41

Asset growth

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0% 2% 4% 6% 8% 10% 12%

2006 Growth

10-Y

ear A

vera

ge G

row

th


Trends ● Challenges ● Solutions

42

0%

2%

4%

6%

8%

10%

12%

14%

16%

-20% -15% -10% -5% 0% 5% 10% 15%2006 Growth

10-Y

ear A

vera

ge G

row

th


Net income growth

43

Annual Growth in Online Banking Customers

0%

10%

20%

30%

40%

50%

2004 2005 2006

Source: comScore, 2007

Annual growth in online banking customers

44

50%

55%

60%

65%

70%

75%

80%

Sep-0

4Nov

-04

Jan-

05M

ar-0

5M

ay-0

5Ju

l-05

Sep-0

5Nov

-05

Jan-

06M

ar-0

6M

ay-0

6Ju

l-06

Sep-0

6Nov

-06

Jan-

07M

ar-0

7M

ay-0

7

Cor

e D

epos

its

as P

erce

nt o

f A

sset

s

First District Regiona l Nationa l Regiona l First District Community Nationa l Community

Core deposit as percent of assets


45

MMDA growth rates

-10%-5%0%5%

10%15%20%25%30%35%40%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Mutual Funds Commercial and Savings Banks

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