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Tuesday, February 27, 2018 / 08:20
AM / Fitch Ratings
U.S. retail deposit growth for the largest online
banks has outpaced that of traditional branch-based banks over the course of
the Federal Reserve's (Fed) five interest rate increases since December 2015,
according to a new report from Fitch Ratings on deposits in the digital age.
Despite online banks' recent progress, however, Fitch believes the trend could
stall if traditional banks initiate more meaningful rate increases on savings
accounts and CDs as the Fed implements further interest rate increases.
Contrary to expectations, the Fed's tightening
cycle thus far has accelerated growth in the deposits of online banks as the
gap between interest rates offered by online banks and traditional banks has
widened. Over the past five years (through 3Q17), Fitch's cohort of eight
online banks grew deposits at a compound annual growth rate (CAGR) of 9.7%
compared to an overall U.S. deposit CAGR of 5.0%.
"So far, deposit betas have been lower than
expected for both online and traditional banks, but the betas for online banks
have started to move up more significantly in the past few months after
virtually no movement following the first couple of rate hikes," said
Michael Taiano, Director, Fitch.
From the end of October 2017 through the end of
January 2018, the online banks that Fitch tracks (excluding Capital One, for
which complete information was not publicly available) increased their rates on
savings and money market accounts by 21 bps on average, implying a deposit beta
of 86%. Fitch defines deposit beta as the percent of a change in the Fed Funds
rate that is passed through in the form of increases in deposit rates.
While the agency's view will continue to evolve as
it observes online deposits' relative performance through an interest rate
cycle, Fitch has historically considered online bank deposits to be less stable
and more volatile in terms of cost than deposits at traditional banks. However,
from a rating perspective, Fitch views the strong growth in online bank
deposits favorably as it has lessened online banks' reliance on wholesale
funding, which tends to be less stable and more costly, particularly during
periods of stress.
Traditional bank deposits tend to be stickier than
online bank deposits given the higher proportion of checking accounts at
traditional banks, versus online banks which offer more savings accounts,
certificates of deposit and brokered deposits. Still, the ease with which
customers can move money between online accounts increases the likelihood that
customers will pursue the highest rates available, causing greater risk of
decay in traditional banks' deposit balances.
Longer-term, online banks may also stand to
benefit more from generational shifts, with the Millennial generation now
larger than the Baby Boomer generation. Millennials' familiarity and comfort
with using the internet and mobile phone apps may result in a greater
willingness to transfer funds held at traditional banks to online banks,
particularly if the pricing gap remains wide.
"We may see a convergence of pricing of
traditional and online deposits as demographics shift towards the Millennial
generation," added Taiano.
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