Are Banks Becoming Utilities?

Banks Don’t Want Your Money

After the fallout from the crash of 2008, banks, especially regional and local banks, are finding they need to adapt to a profit squeeze. Add on top of this new regulations from the financial overhaul bill, and these banks are going to look more like banking utilities than profit centers.

According to a report released by Accenture:

“The subprime segments that drove very high margins prior to the crisis have effectively disappeared,” said the study, which was issued last week. “They are too expensive for many banks to serve now that their risk profile has been fully recognized and priced in.”

Of the 46 banking executives contacted, just under half told Accenture that the profitability of their average customer had dropped 5% to 11% since the crisis began. A further 11% cited a drop in profitability of greater than 15%. And nearly two-thirds of the executives reported an increase in “shopping around” for services, meaning customer-bank relationships are becoming more volatile.

It turns out that customers want more control over their banking activities.

A look at earnings reports show that bank earnings are improving, but:

These small banks continued to get hit with nonperforming loans and chargeoffs, but they did not take as bad of a beating as they did the previous quarter and a year earlier. Median net income rose by 4%-9.6% from the previous quarter depending on the region, according to a report from Sandler O’Neill & Partners LP and SNL Financial LC. At the same time, regional declines in nonperforming loans ranged from 2.3% to 9.5%.

The key to profitability: “Lower expenses, higher net interest income, and the strides in credit quality fueled earnings growth.”

Many community and regional banks have aggressively charged off loans, mostly in commercial and construction financing. Despite signs of stability in delinquencies, banks still have to reappraise properties that serve as collateral. And when appraisals come in lower, the bank has to write it down, whether or not the loan is delinquent which in turn, hurts capital. …

Though there is still a lot of liquidity, there is not much loan demand, so banks continue to contract balance sheets overall …

Here’s the shocker: banks don’t want your deposits because they are too expensive to maintain when their margins are being compressed:

With attractive lending opportunities hard to come by, bankers are finding themselves doing what would have been unthinkable just two years ago: discouraging deposits. Most large and regional banking companies are drowning in deposits, raising concern that excess liquidity could be a drag on earnings in coming quarters.

Though interest rates on deposit accounts are manageable, due in part to historically low rates, costs remain associated with handling those relationships. Banks have also seen their ability to charge certain fees, on overdrafts, for example, constrained by the recent wave of financial reforms.

Now the primary options left for banks involve turning depositors away or housing deposits at the Federal Reserve. … “The only way to get a higher yield is to take on more risk, and bankers are saying they aren’t willing to do that yet” …

“The bottom line is that it hurts your margin if you get a lot of deposits and have nowhere to put them” …

Early this year, a large inflow of deposits benefited banks despite limited opportunities to turn around and lend the money. Instead, bankers could let higher-rate brokered certificates of deposits mature, replacing them with the lower-cost “core” deposits. They were also investing some excess funds in securities, but regulators this year warned against such a strategy due to the interest rate risk associated with hefty portfolios.

More unintended consequences of legislation just at a time when the Fed and the Administration want to increase liquidity.