A Bank Stock's Real Moat Is on the Deposit Side Of the Balance Sheet
Key Points
Deposits are not only extremely sticky, but they also come at lower costs relative to other sources of capital.
Banks that have growing deposit balances can fuel loan growth at more favorable terms.
Net interest margin, a key performance metric in the banking industry, can benefit from a larger deposit base.
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Investors probably think that financial services companies are way too complex to analyze properly. There is some truth to that assumption, but it doesn't mean that the entire industry should be off-limits. Breaking down the key drivers of these businesses is a good first step.
Let's turn our focus to deposits. A bank stock's real moat lies on this side of the balance sheet. Here are three reasons.
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1. They're a source of low-cost capital
Banks can raise capital in numerous ways. One way is to tap debt markets, for instance, via unsecured and securitized funding sources. But these come at higher borrowing rates.
Here's where deposits matter. They are essentially the lifeblood of any commercial bank. Not only are deposits a low-cost capital source relative to other funding mechanisms, but they are also viewed in the industry as being incredibly sticky, meaning they tend to stay put.
During the second quarter, Bank of America said that 92% of its checking account customers use them as their primary account. This means that it likely serves as the base around which a person's entire financial life revolves. Once established, it's hard for consumers to switch to rival offerings.
Scale also plays a factor. The money-center banks all have enormous deposit balances measured cumulatively in the trillions of dollars. Given that they are generally viewed as being much safer than the rest of the industry -- likely due to their status as global systemically important banks that have the protection of government intervention -- customers feel safe leaving their money here. Their recognized brand names and established histories also help.
2. They fund loan growth
Investors can think of banks as being similar to manufacturers. The obvious difference in this case, however, is that capital is the raw material that financial institutions need to operate successfully. Having low-cost deposits provides the fuel that powers loan growth.
Regulations require that commercial banks keep a small portion of their deposits in reserve. The rest can be lent out to customers, including individuals, small businesses, and corporations.
And these loan products can take a variety of forms, from credit cards and mortgages to commercial real estate loans and revolving lines of credit. Thanks to a sizable deposit base, banks can also offer these lending products at favorable terms, which can drive borrower demand.
SoFi Technologies is a great example. It received a national bank charter in early 2022. Since the halfway mark of that year to June 30, 2026, deposits skyrocketed 1,585% to $45.5 billion. That surge was the tailwind that propelled the loan book. SoFi ended the 2026 second quarter with $47.9 billion in total loans, up 49% year over year.
3. They support higher profitability
As mentioned, deposits are a low-cost funding source. And they help to power loan growth. Taking these two factors together, banks are able to support higher profitability.
Specifically, this comes down to the net interest margin (NIM). This metric looks at the difference between interest income earned on loans and other assets and interest expense paid on deposits and other borrowings. The total is then divided by the bank's average earning assets.
A higher figure is better. It's a sign that a financial services institution is making more money from its lending activities, while keeping its funding costs under control.
Banks also don't have to increase the rates they pay to depositors in lockstep with what they charge borrowers. This provides some flexibility. It's important to keep this in mind as the Federal Reserve potentially keeps raising its benchmark federal funds rate to fight inflation. Since deposits at huge financial institutions are extremely sticky, banks can hold those rates fairly steady while they charge more on new loans. That can boost their NIM, at least for a while. If high rates persist, banks eventually have to start raising deposit rates to prevent customers from moving their money elsewhere.
The next time you find yourself looking at a bank stock, remember just how important deposits are to its competitive position.
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Bank of America is an advertising partner of Motley Fool Money. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
