Banks battle for deposits

As mortgage troubles continue, old standby is new competition

NEW YORK — Amid all the noise about mortgages going sour and the difficulties banks are having unloading corporate debt, it can be easy to overlook their core business — plain, old-fashioned deposits, the kind Grandma drives to her local branch to make.

They're a huge source of profit, and the battle over them is heating up.

"Across the board, banks have put more effort into the deposit business in the last couple of years," said Aaron Fine, director of the retail and business banking practice at Oliver Wyman, a firm that researches and consults for the banking industry. "There's been a lot of new competition from new entrants, and you're seeing the large banks react to that."

Deposit growth isn't an item banks break out specifically in their quarterly earnings reports, even though it's a big profit pool. Oliver Wyman estimates that last year, $45 billion to $55 billion, or about half, of U.S. bank profits, came from individual and small business deposits.

"Given how important deposits are to bank earnings, it's a little surprising," Fine said, noting that Bank of America Corp. is the only major bank that files how much deposits contribute to its financial results.

Big banks such as Bank of America, Citigroup Inc. and JPMorgan Chase & Co. do investment banking, so deposits don't make up as large a percentage of their profits as they do at other banks. Still, Bank of America's filings last year indicated that deposits brought in more than a third of its income.

The large banks aren't losing actual deposits, but they've been losing market share to smaller competitors such as Commerce Bancorp, Signature Bank, First Republic Bank and Umpqua Bank, according to Oliver Wyman data. These regional banks have been especially successful in attracting wealthy people and small businesses by offering specialized services and better rates.

In response, the large banks have been ramping up efforts to capture and retain customers. Citigroup last year teamed up with 7-Eleven to put its ATMs in convenience stores and has been using kiosks in its own bank branches to conduct customer service surveys.

Just recently, Bank of America built a Web site aimed at small-business owners, who are particularly sought-after depositers because of how much money they bring in.

Nationally, deposit growth is slowing. It grew 4 percent between the second quarter of 2006 and the second quarter of 2007, after growing 8.6 percent the previous year, according to the Federal Deposit Insurance Corp.

Early in the decade, this figure was in the double-digits when economic turmoil caused people to pull money out of riskier assets and place it in savings accounts.

The recent slowdown is a bit deceiving: It's happening largely because more people have taken money out of savings accounts and put it into higher-yielding money-market accounts. This is what 26-year-old Ann Geppert did in September, and now she has an annual rate of nearly 5 percent on her savings instead of about 1 percent.

"I'll be putting more into it a little bit later," said Geppert, who works at a public relations firm in St. Louis. "It's a lot better deal."

A few years ago, savings accounts offered better rates than money-market accounts. Banks' profits from money-market accounts have slipped because the yield curve — the difference between long-term and short-term yields — has been close to flat. Banks profit when long-term yields are significantly higher than short-term yields, because they borrow cash at short-term rates to lend to customers at long-term rates.

"The banks were under, and are under, considerable margin pressure," FDIC chief economist Richard Brown said.

The yield curve has improved a bit over the past few months, but it's still not as beneficial to banks' profit growth as it was a few years ago.

"While growth should improve into 2008 along with a more favorable interest rate environment, the benefit is not likely to be material until the yield curve improves," Goldman Sachs analysts said in a research note.