US banks see margins widen by deposits surging
Lahore, Islamabad, Karachi Thursday, December 02, 2010, Zul Haj 25, 1431 http://Pakbanker.com.pk
NEW YORK: Profit margins at U.S. banks may get a boost from increasing deposits as customers show a preference for immediate access to their money and less appetite for risk with interest rates at a record low and the economy still seeking a bounce from recession.
Commercial banks in the U.S. added $88.9 billion of socalled core deposits in the third quarter, bringing the total to $6 trillion, the most since at least 1992, according to the Federal Deposit Insurance Corp. Wells Fargo & Co., the fourth-largest lender by deposits and fifthranked U.S. Bancorp have said they're competing for such funds, which include checking and savings accounts and time deposits of less than $100,000.
Banks are relying more on deposits for funding after a freeze in credit markets sparked the financial crisis and led to the bankruptcy of Lehman Brothers Holdings Inc. in September 2008. The industry must shift from raising funds in debt and securitization markets to increasing core deposits, which pay little or no interest, analysts say. The average rate of 0.80 percent on bank deposits is the lowest since at least 2000, according to Market Rates Insight in San Anselmo, California. "Other sources of funding are drying up," said Christopher Whalen, a former Federal Reserve analyst and cofounder of Institutional Risk Analytics in Torrance, California. "The banks that have stable funding will inherit the earth." Banks consider core deposits more dependable in times of stress since customers with checking and savings accounts are more likely to keep their money in the bank than bond investors or lenders. Lehman and business lender CIT Group Inc., financial companies more reliant on credit markets, filed for bankruptcy when their traditional sources of funding vanished.
Borrowing by U.S. commercial banks fell 17 percent since July of last year, while deposits, excluding large time deposits, increased 9 percent in the same period, according to the Fed. About two-thirds of the core deposits added by banks in the third quarter, or $59.4 billion, were deposits that don't pay interest, according to the FDIC.
Leverage, the ratio of assets to total equity, fell in the second quarter to 8.8, the lowest since 1988, for banks with more than $20 billion in assets, according to federal data. Total deposits rose to 56.3 percent of assets at 22 of the 24 firms in the KBW Bank Index through Nov. 22, from 50.3 percent at the end of September 2008, according to Siddharth Jain, a bank analyst at KBW Inc. Citigroup Inc. and McLean, Virginia-based Capital One Financial Corp. don't provide figures. -PB News