ANALYSIS: Wirehouses Paying Up in Race for Deposits
For the first time since the Federal Reserve began raising interest rates almost two years ago, banks and brokerage firms are being forced to pay more for customer cash.
In earnings calls in the past week, Wells Fargo, Morgan Stanley and Bank of America Corp. said they have begun paying more for the cash that wealth customers shift (or have automatically shifted through sweeps) from their investment to bank and money-market accounts.
Net interest income at the wealth units continued to show a healthy rise as brokers extended mortgages and other loans to their traditional investment customers, but bank analysts sought reassurance that the net interest margin reflecting the difference between what is paid on deposits and earned on loans won’t be narrowed too deeply by a deposit war in wealth management and other areas of the banks.
Morgan Stanley began raising certificate of deposit rates to its wealth management customers in June, and has inched up rates on bank deposits throughout the third quarter to an average of 0.06% from around 0.01%, Chief Financial Officer Jonathan Pruzan told analysts who pressed him on the issue on the company’s upbeat third-quarter earnings call on Tuesday.
The average rate paid for cash that Bank of America swept from its wealth division customers’ investment accounts to the bank rose to 0.33% as of September 30 from 0.01% at the beginning of the quarter, said a person familiar with the change.
Wells Fargo has lost some of the “punch…that you used to be able to make by just being half of what everybody else did in deposit increases,” Marty Mosby, an analyst at Vining Sparks in Memphis, Tenn., said on Wells’ earnings call on Friday.
John Shrewsberry, Wells’ chief financial officer, said the bank had no choice but to reprice “some incremental deposits” for commercial and wealth/investment management clients due to market pressure.
“Sophisticated clientele with a lot of excess liquidity and a lot of options” drove the change, he said.
The pressure to raise rates, though moderate, is likely to increase. The Federal Reserve has signaled that it will boost its key lending rate to banks by another 25 basis points by yearend, bank officials said on their earnings calls. It last boosted its target interest rate to 1.25% from 1.00% in June.
The challenge for the banks will be to keep finding cheap money from brokerage customers. The issue is not so much that net interest margins will be decimated, but that the deposit pie is shrinking as wealthy customers are starting to put their investment cash to work.
Average deposits at the Global Wealth and Investment Management division of Bank of America fell 6% during the third quarter from a year earlier to $240 billion as customers moved money into the rising markets, chief financial officer Paul Donofrio said on the firm’s earnings call on Friday.
At Morgan Stanley, cash from wealth management clients is at its lowest level in many years, Pruzan said, noting that the company is lining up an array of new funding mechanisms, including using more wholesale deposits. The wide margins the bank has enjoyed from deploying low-rate deposits into higher-rate loans ended “sooner than anticipated as we saw more cash go into the equity markets,” he said on Tuesday’s earnings call with analysts.
The process, to be sure, is slow. Morgan Stanley’s U.S. bank deposits still rose 2% to $154.2 billion as of September 30 from $150.3 billion a year ago (though assets in advisory accounts grew much faster). At the same time, the total securities-based and residential loans Morgan Stanley made to its wealth management clients jumped 15% to $66.3 billion as of the end of the quarter from $57.7 billion 12 months earlier.
Net interest income in wealth management shadowed the lending growth, rising 16% year over year to $1.02 billion, or almost one quarter of the division’s total revenue. Calculated another way, the division’s net interest income approached the investment banking revenue of $1.3 billion that the company booked in its biggest division, institutional securities, during the third quarter.
At Wells Fargo, net interest income in its wealth and investment management business soared 19% in the third quarter to $1.2 billion from a year earlier. The division includes the bank’s private banking and asset management businesses, as well as its brokerage and advisory services.