October 15, 2012
Financial Sense

Bank deposit growth hits a 12-year low

Connecticut banks experienced their smallest rate of deposit growth in more than a decade last year, a sign that a sour economy, increased competition and measly interest rates are potentially changing the way people manage and invest their money.

The 71 banks operating in Connecticut had a total of $102.7 billion in deposits as of June 30, according to a market share data report recently published by the Federal Deposit Insurance Corp. That was only a 1.1 percent increase over the prior year and represented the smallest deposit growth rate since 2000 when Connecticut banks actually saw a slight decline in deposits.

In the previous four years — from 2008 to 2011 — Connecticut banks saw at least a 5.73 percent increase in deposits, FDIC data shows.

The slow growth, bank experts say, could be driven by several factors including the low interest rates currently being offered by banks to consumers who are willing to dump cash into checking or savings accounts and certificates of deposit.

According to Bankrate.com, the average interest rate for a checking account in Hartford County is well under 1 percent, ranging from 0.01 percent to 0.2 percent.

Certificate of deposit rates aren't that much better.

A one-year CD in Hartford County, for example, has an interest rate ranging from 0.03 percent to 0.5 percent, while a five-year CD has interest rates ranging from 0.5 percent to 1 percent, according to Bankrate.com.

"There are very low rates of return right now and it may be that depositors with large amounts of money are looking for more cost effective alternatives," said Patricia McCoy, the director of the Insurance Law Center at the University of Connecticut School of Law.

With such low rates of return, McCoy said, people are increasingly shopping for alternative options to store their cash, including money market accounts or even mutual funds.

At the same time, McCoy said many banks are increasingly adding new fees to checking and saving account products that are creating less incentives for some people to use those services.

"For retail deposit accounts, fees have been going up on average," McCoy said. "Now only about a third of banks offer free checking and that is a big drop from prior years."

Virginia-based banking consultant Bert Ely said he expressed some skepticism about the aggregate deposit data for Connecticut because many multistate banks can move around deposits, which can distrort state-by-state numbers.

Nationally, deposits grew by 8.4 percent, which would put Connecticut well behind the rest of the country, Ely said.

"Aggregate totals can be misleading," Ely said.

San Francisco-based Wells Fargo, for example, which is a relative newcomer to Connecticut after its acquisition of Wachovia Bank, saw its deposit base shrink by 8.3 percent in the state, FDIC data shows. But company spokesman Kevin Friedlander said the decline in deposits was a result of "administrative balance movements," related to the Wells Fargo/Wachovia merger, which was not complete until the end of first quarter 2012.

Regardless, the deposit environment still isn't great.

John Patrick, CEO and president of Farmington Bank, said many lenders are sitting on excess liquidity, which is making them less interested in taking on new deposits and hesitant to offer any significant interest rates on new funds.

Banks, particularly community lenders, make most of their money on the difference between the interest they pay to depositors and the interest they earn on loans.

With interest rates at historically low levels, particularly for mortgages, a bank's ability to make money is constrained, so they can't offer great interest rates on deposits or CDs for customers.

As bank's take in deposits, they must find investment vehicles to park those funds that will provide a reasonable return so they can make money. That can be a challenge in the current low interest rate environment, Patrick said. "We are not going to take in additional deposits to lose money," Patrick said. "No one is offering great rates these days."

Patrick said he believes people also have less money to put into a bank account, either because they are continuing to pay down debt — a prevailing trend since the 2008 financial crisis — or because they have less money due to poor economic conditions.

"For many people their wages are stagnant and the cost of commodities is rising," Patrick said. "The average family is struggling to stay ahead."

Overall in Connecticut, most deposited funds are held by just a handful of lenders. Bank of America has maintained a stranglehold over market share in the state for years, and had $24.3 billion in deposits at the end of June, giving the bank control over nearly 24 percent of the market.

Waterbury-based Webster Bank is the second largest Connecticut lender with $11.6 billion in deposits, good enough for control over 11.4 percent of the market.

People's United Bank, Wells Fargo Bank, TD Bank, and First Niagara Bank are the next largest lenders in the state with $10.1 billion, $8 billion, $5.5 billion, and $4.9 billion in Connecticut deposits respectively.

In most cases, Connecticut banks added at least some deposits over the last year. Bank of America, for example, saw its deposits grow by 1.1 percent, which was in line with the statewide average. People's United Bank saw a more substantial increase of 8.6 percent.

But there were also some large lenders that saw their market share take a dip. First Niagara Bank, another relatively new name to the Connecticut banking scene, saw its deposits shrink by 5.7 percent.

First Niagara Bank spokesperson Oliver Hays said the company's strategy is "not about growing deposit balances especially if the growth is driven by competing on price."

Instead the bank focuses on attracting and retaining customers by building a relationship that includes a core checking account, a savings or investment product, and any borrowing needs, Hays said.

But the competition for depositors isn't just among traditional banks. Increasingly, credit unions and online only banks are becoming attractive alternatives to consumers, in part, because they can usually offer higher rates than banks, industry experts say.

Online only banks don't have the overhead expenses of traditional brick and mortar financial institutions, and credit unions have a coveted not-for-profit status, which exempts them from certain taxes.

Greg Bordonaro writes the Financial Sense column every other week. Reach him at gbordonaro@HartfordBusiness.com.

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