The billions of dollars doled out in forgivable small-business loans and personal stimulus checks made their way to recipients through their bank accounts.
The result: many financial institutions found themselves flush with deposits – essential to provide the liquidity to lend and, in turn, earn money. But while banks and credit unions have reaped the rewards of the Paycheck Protection Program and stimulus dollars for their own balance sheets, the good times may be short-lived as federal aid ends.
How and whether banks can hang onto – and continue to grow – deposits depends largely on the still-uncertain economic recovery.
R. Scott Siefers, managing director for Piper Sandler Cos., predicted financial institutions might see small increases in deposits for the rest of the year, but “nowhere near the embarrassment of riches we’ve seen in the last several months.”
Without PPP and stimulus, a third of new deposit growth may not stay in those savings accounts for long as depositors tap into that money, Siefers said.
But at the same time, an economic rebound means businesses and consumers may see increased earnings, which would allow them to replenish those accounts.
Already, The Washington Trust Co. has seen this starting to happen, said Amy Arruda, the company’s senior vice president of retail banking.
“The business cycle is naturally taking its course again,” Arruda said, referring to how business customers are putting their new sales revenue into their savings accounts.
‘The business cycle is naturally taking its course again.’
AMY ARRUDA, The Washington Trust Co. senior vice president of retail banking
Meanwhile, retail customers who stored away their stimulus checks can finally spend again on vacations and fine dining. However, the importance of having money socked away for that “once in a lifetime” event – such as a global pandemic – may stick with them, translating to deposits with staying power, Arruda said.
The $4.5 billion in deposits Washington Trust reported as of March 31 represented a nearly 22% year-over-year increase and a $171 million boost over the prior quarter.
The reason why banks want strong deposits is for the liquidity to lend. But so far, loan activity has not kept pace with deposit growth, creating a problem of excess liquidity.
Bank of America Corp., for example, which has the second-largest share of the Rhode Island market, reported a $300 billion increase in deposits nationally from April 2020 to April 2021, according to its earnings report. However, total loans and leases were down $148 billion in that same period.
Financial institutions are banking on a resurgence of new loans as the economy picks up and businesses look to rebuild depleted inventories. But this sunny outlook has a few rain clouds, too: Companies across industries are experiencing excess liquidity due to reduced spending and increased government aid over the last 15 months, Siefers said.
That means stiff competition among banks, credit unions and fintech firms as they look for high-quality lending opportunities that make use of their deposits. There is also competition among financial institutions for the deposits themselves.
John Woods, chief financial officer for Citizens Financial Group Inc., which has the largest share of deposits in Rhode Island as of June 2020, alluded to this competition in the company’s first-quarter earnings call.
“We will continue to be proactive in pricing down deposits and pursuing attractive loan growth opportunities in areas like point-of-sale finance and education, as well as attractive commercial segments,” Woods said.
What this means in terms of interest rate changes is unclear. Citizens declined to be interviewed for the story. Other banks and credit unions were also reluctant to commit to rate changes.
Better rates are the most obvious way to beat the competition, but there are other strategies to entice customers. Among them is “ease of use,” Siefers said, such as user-friendly mobile apps and online offerings.
Timothy Blake, a consumer banking executive with Bank of America in Rhode Island, said the company’s award-winning digital offerings are a key reason for deposit retention and growth.
“Clients are really asking for convenient and safe access wherever they are, be it their living room or on a vacation,” Blake said. “Having that bank in the palm of their hand is really empowering for our clients.”
Pawtucket Credit Union, meanwhile, recently debuted a three-year, easy-access certificate of deposit account, which lets customers make two penalty-free withdrawals while earning a 0.75% annual interest rate. Participation has been strong in the month since the new account launched, said CEO and President Brian Azar. He declined to share specific numbers.
For Arruda, Washington Trust’s community reputation is a differentiator, evidenced by the many conversations she has had with PPP recipients not just about their loans but their personal struggles and stories.
“We genuinely care about the customers, and that means a lot, especially during this time,” she said.
Nancy Lavin is a PBN staff writer. Contact her at Lavin@PBN.com.
