Boston Private Bank & Trust Co. saw deposits increase more than 15 percent in the second quarter to a little more than $1 billion.
Banks in the Northeast fared well in the second quarter of 2002 and the trend is likely to continue throughout the year, according to industry observers.
Matthew D. Pieniazek, president of Darling Consulting Group in Newburyport, said banks have benefited from two years’ worth of aberrantly high rates of deposit growth, a trend that continued in the second quarter. Although bank deposits have been growing steadily over the last 10 years, the fluctuations of the stock market have spurred consumers to “park” even more of their liquid assets in banks until the stock market becomes more stable. But while the trend is good for banks in the short term, it isn’t reflective of a permanent change in investment philosophy, said Pieniazek.
“I believe it’s a temporary phenomena where a good chunk of this money that’s flowed into this system will flow back out. So that could create some liquidity or funding challenges going forward,” he said.
But temporary or not, the influx of deposits has benefited many local banks, especially those that focus on high-net-worth clients who may have more cash on hand than usual following a retreat from the shaky stock market. One such institution, Boston Private Bank & Trust Co., recorded a solid second quarter, with higher deposits helping to offset earnings lost on the investment management side of the business.
However, the large pool of available money has caused problems for banks, as well, in the form of fierce competition to garner a share of it. Pieniazek is seeing what he calls “irrational pricing” by banks. While the money is flowing in, banks are offering very high premiums and above-market interest rates to attract that money. He also said that when other investment options stabilize, the money could flow out of banks as quickly as it came in.
Banks that are properly diversified should be able to balance this tidal flow of liquidity. “Any institution that has more diversified business, in that they have revenue and earnings from a variety of sources – if they structure them correctly – when one aspect of the economy has an impact on slowing down one end of the business, other aspects may kick in,” he said.
‘Liquid Investments’
Pieniazek counts Boston Private Bank among his clients, and so would not comment about the 15-year-old institution specifically. But Timothy L. Vaill, Boston Private Bank’s chairman and chief executive officer, said that the bank does, indeed, employ a strategy of diversification, focusing on three core capabilities: investment management, financial planning and private banking.
“We focused on those for the financial diversification that it would give and, in fact, that’s happened. The high markets, low markets, high-interest-rate markets, low-interest-rate markets … in the past six months of this year have really underscored that particular strategy,” Vaill said during a recent earnings conference call.
Boston Private’s net income in the first half of this year was $12 million on revenues of $57 million. The assets under management at the end of June were $6.5 billion, which is a slight decline from the end of first-quarter levels of $6.8 billion but flat compared to the end of 2001. The company’s private banking balance sheet grew during the second quarter to $1.7 billion, up $122 million from the end of the first quarter.
Deposit balances in the second quarter increased 15 percent to a little over $1 billion, according to Walter M. Pressey, president and chief financial officer at Boston Private, while the average cost of deposits has gone down.
According to Vaill, who spoke with Banker & Tradesman in an interview last week, the flight from the stock market has affected the bank in both positive and negative ways. “Obviously, if our customers leave the stock market, that means our investment management business goes down, the volumes go down, the assets go down and our fees go down, so that hurt us.”
On the positive side, many people fleeing the stock market are putting the money into the bank. “We can again return to our profitable levels very handily. We saw that happen in the first half of this year where we saw our deposits up significantly over original budget [projections], primarily because people are leaving the stock market,” said Vaill.
“Of course we’d like to keep their money in the stock market but to the extent they do leave, I think we stand a chance to retain at least some of it.”
Unlike other companies, Boston Private focuses on high-net-worth individuals who tend to have more patience in the stock market because they are long-term players. They also often recognize it’s important to have investment managers instead of day-trading themselves, he said.
Vaill said he is very pleased with the second-quarter earnings and said it proves the bank’s diversification strategy is solid. “We’ve had the same strategies in good markets and bad markets, bull markets and bear markets … because we have strong relationships with people and their families, they rely on us to do the best we can for them in whatever market conditions.”
In general, the banking sector in New England is healthier than it has been in many years, said Pieniazek. Community banks, especially, are poised for the economic recovery. There are challenges lurking in 2003 and those challenges are arising from the fact that many institutions are at or near their peaks in terms of net interest margins and net interest income. Without substantial growth, many institutions may be looking at some downward pressure in 2003, said Pieniazek. But that’s next year.
“The best game in town right now is banks. The highest yield right now for liquid investments is banks. It blows away market yields, brokerage yields – it just blows those away,” said Pieniazek.
