Credit: Shutterstock photoData compiled by the Federal Reserve shows that U.S. commercial banks currently hold roughly $10.7 trillion in deposits - a figure that has more than doubled over the decade from the $5-trillion level in late 2004. (( Assets and Liabilities of Commercial Banks in the United States (Weekly) - H.8 , Federal Reserve Website)) Over recent years, the single biggest factor behind the sharp increase in the banks' deposit base is the low interest rate environment that has persisted since the economic downturn of 2008. This is because the record-low interest level has forced individual as well as institutional investors to shift a bulk of their liquid assets into interest-bearing deposits due to the lack of many lucrative investment options.
While a steady growth in deposits is expected over time and is essential to ensure low-cost funds for the country's banking system, this exceptionally high growth rate has actually been an issue for the banks. This is because they have had to incur much higher interest expenses on deposits over the period - exacerbating the problem of shrinking net interest margins across the industry. While it can be argued that the banks also generate several fee-based revenues from their deposit services, the growth in these revenues has not been fast enough to counter the associated interest expenses.
In this article we detail the changes in deposits at the country's four largest banks - JPMorgan Chase ( JPM ), Bank of America ( BAC ), Citigroup ( C ) and Wells Fargo ( WFC ) - over the last three years. While JPMorgan overtook Bank of America to become the bank with the largest deposit base in late 2011, the strong growth in deposits for Wells Fargo over recent quarters will likely result in the country's largest bank in terms of market capitalization becoming the largest bank in terms of deposits in the near future.
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The following table shows the average quarterly value of all deposits held by these four banks over the last twelve quarters. The data has been compiled using figures reported by individual banks as part of their quarterly announcements and includes both interest-bearing and non-interest-bearing deposits.
One thing that stands out from the table above is the sheer size of the deposit base for these four banks. At the end of Q4 2014, these banks had almost $4.6 trillion in deposits among them - which is almost 45% of the total deposits for all U.S. commercial banks. The fact that the total size of deposits for the fifth largest commercial bank - U.S.Bancorp - is just $271 billion should give a clear idea of how large these financial institutions are.
That said, it should be noted that these banks do not operate exclusively in the U.S., and have a considerable retail banking presence outside the country. Citigroup stands out in this regard, as the globally diversified banking group reported an average deposit base of just under $415 billion in the U.S. for Q4 2014 - 44% of its total deposit size. In comparison, deposits in the U.S. account for 94% and 91% of the deposit base for Bank of America and Wells Fargo respectively. Non-U.S. deposits account for a little more than 20% of JPMorgan's total deposits. Taking in consideration only the deposits from U.S. operations for these banks, their total deposit base in the U.S. is roughly $3.6 trillion - well over one-third of the total deposits held by all U.S. commercial banks.
JPMorgan leads the industry with almost $1.3 trillion worth of customer deposits across its global branch network. Having grabbed the top spot from Bank of America by the end of Q3 2011, the diversified financial giant accounts for slightly less than 10% of all deposits in the country. The only quarter in which the bank reported a sizable decline - Q2 2012 - is when it revealed a multi-billion dollar loss from the "London Whale" incident. The steady growth in its deposit base since then shows that customers did not take much time to put the debacle behind them. Over the last three years, JPMorgan has seen deposits grow at an average annual rate of just under 7% - a remarkable feat considering the sheer size of the bank's existing deposit base.
JPMorgan's exceptional growth rate is rivaled only by Wells Fargo, which saw deposits grow an average of 9.5% annually over the same period. Wells Fargo came out of the economic downturn without any major legal trouble despite having swelled in size from its acquisition of Wachovia. The bank also gained from the mortgage refinancing wave, as thousands of customers who switched to Wells Fargo's mortgage offerings also moved their deposit accounts to the bank. This helped the bank cement the second position in the list - overtaking Bank of America in late 2013.
Bank of America witnessed the slowest growth among these banks, as its deposit base grew by under 2.4% on average over the last three years. The bank's focus on cutting costs by getting rid of branches in lower-profitability regions as a part of its Project New BAC reorganization plan is responsible for this. On the other hand, Citigroup's deposit base has shown the largest amount of fluctuation over the years. This can be attributed to the banking giant's significant international diversification, which makes the dollar value of its deposit base extremely sensitive to foreign exchange rate changes from one quarter to the next. This is particularly true for the second half of 2014, when the strengthening dollar negatively impacted the size of total deposits.
This brings us to an important question regarding the banks' deposit base - will it continue to grow at these high rates over coming years? We don't expect it to. As we pointed out, the biggest reason for the high growth rate since 2010 has been the Fed's decision to maintain interest rates at record low levels. With the Fed winding up its asset purchase program and hinting at a hike in interest rates as early as June this year, the interest rate environment can be expected to improve over subsequent quarters. This will open up better investment options for individuals as well as institutions - which will likely drastically reduce the deposit growth rate. In fact, the growth rate has fallen to a great extent over the last few quarters, and we expect this trend to continue for a few more quarters before stabilizing.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
