John Bitner – ‘Safety and liquidity’

Deposits have been increasing steadily across the country as amateur investors lose confidence in their ability to accurately analyze the stock market, resulting in a shift of money into the safe havens offered by banks, according to industry observers.

For the nine months ended in September, total deposits for Southern New England (Massachusetts, Connecticut and Rhode Island) had reached nearly $300 billion, according to Jim Eckenrode, group research director of consumer banking at TowerGroup, a Needham-based research company. While total deposits have been increasing steadily, the most recent year-over-year figure of $300 billion was very high, representing a 22 percent increase compared to the 2000 figure of $246 billion. From 1999 to 2000, total deposits for the region increased only 2.5 percent from $240 billion to $246 billion.

Eckenrode attributes the significant increase to the recent downturn in the market. People have been liquidating a lot of positions and putting money back into insured deposits – certificates of deposits, money market accounts – sort of riding things out, converting back more into cash until the market stabilizes a little bit, he said. Consumers will probably move back into the market once it improves, he noted. However, the events of Sept. 11 threw the country into a recession by causing one of the only sectors not in decline at that time – consumer confidence levels – to plummet.

But how soon deposits again will begin to flow out of banks and into other investment venues depends on the individual investor, which Eckenrode categorizes into three types: active traders, time-challenged observers and strategic investors.

The active traders are in the market doing day trading, potentially taking short positions. They’re going to be more skittish about the stock markets than the people who are either time-challenged observers or the people who are strategic investors who just say, ‘Look, I’m going to continue to put money in the stock market on a semiannual or annual basis,’ and think long-term and buy and hold, he said. Time-challenged observers are now more likely to seek face-to-face advice from advisors because they don’t have time to perform the necessary research.

According to preliminary figures published in the Quarterly Journal of the U.S. Office of the Comptroller of the Currency, deposits at the 2,176 commercial banks for the second quarter showed a 4 percent rise over the second quarter last year, for which 2,302 banks were included. The Northeast and Southeast held the majority of the funds.

I think it’s a good thing for banks, said Eckenrode. The more a bank has in core deposits, the lower its cost of funds becomes and the more able a bank is to make loans – an income generator, he said.

‘Waning Loan Demand’
Boston-based Eastern Bank experienced an 8.4 percent increase in total deposits for the nine months beginning Jan. 1 and ending Sept. 1. Core deposits (not including CDs) as of Sept. 30 were $1.88 billion, up 11.1 percent from the Jan. 1 figure of $1.69 billion.

According to John Bitner, chief economist at Eastern, the rise in deposits is unusual only when compared to recent bull market history. Such a trend is to be expected when a decline in the stock market occurs, he said.

When people become concerned more about the return of their principal than the return on their principal, they tend to pull their money into the banks for safety and liquidity, said Bitner.

Of course, while increasing deposits is generally good news for banks, it does present challenges.

One of the Catch-22 situations is that when the economy slows and consumers become concerned and begin to redirect their money into the banks is also when loan demand starts to dry up. So, the banks end up with a lot of deposits and a waning loan demand. Therefore the problem becomes what to do with all the excess money, he said.

Investing the money or buying loans from other businesses are two routes a bank can take. Eastern chooses to invest the money, said Bitner.

There’s a lot out there [to invest in] but you don’t get a whole lot of yield. The yields are the lowest they’ve been in about 40 years, so it does put some pressure on the spreads, he said.

The declining interest rate also compresses the margin, said Bitner.

While home purchases are expected to suffer until the economy improves, this year will be a record year for refinancings, according to the Mortgage Bankers Association of America. It predicts year-end figures of $960 billion in consumer refinancings for 2001.

The mortgage refinancing business is still strong, said Eckenrode. Which is, in one respect, good for financial institutions in that they’re converting positions back into higher interest charges and lower principal amortization. You’ve got somebody whose had a loan for five years and they refinance, a greater percentage of the payment goes to interest, he said. But there’s a down side to the refinance boom. Banks can also have a lower revenue. That is to say, I make less money on a 6 percent mortgage than I do on an 8 percent mortgage. So that puts challenges on [banks] on the deposit side. They have to cut their rates on the deposits primarily because they still need to maintain their net interest margins.

Eckenrode sees the inflow of deposits to banks continuing, depending on the length of the recession and how long the stock market performs poorly.

First of all, I don’t think the Fed [Federal Reserve Bank] can cut rates more than they have, so you’re running up against a floor there. If the stock market starts to rebound, I think people are going to be more interested in sticking their toe in the water in the capital markets again, he said.

But the net result of the tumultuous year in the stock market may have warmed investors to having a trusted advisor. The recent losses many people took after years of easy, profitable investing has led many to realize the stock market isn’t as easy to play as they once thought, said Eckenrode.

For banks, that may be a golden opportunity. Now is the time for banks to capitalize on having consumers’ money, Eckenrode said.

There’s an opportunity to capture more of the [customer] relationship. There’s an opportunity to capitalize on that level of contact. The window is not going to be open forever because, historically, the stock market offers the greatest year-on-year return of any sort of financial vehicle – treasuries, bank deposits, certificates of deposit, whatever it might be. The stock market has traditionally outperformed [other investment options], said Eckenrode.

That, too, may be an opportunity for banks, many of which are still gearing up to offer the same type of investment advising services that are readily available at the Fidelitys of the world, said Eckenrode.

The advantage that banks have that Fidelity doesn’t is they have a branch on every street corner, which consumers like, especially in times where returns are not as straightforward. Where advice is more important, they like that face-to-face contact, he said.