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Announcement:

Moody's: Slowdown in noninterest-bearing deposit growth is credit negative for US banks

26 Apr 2018

New York, April 26, 2018 -- During 2017, many large US banks reported a material slowdown in the growth of noninterest-bearing deposits, a credit negative, Moody's Investors Service says in a new report. This trend is likely to continue in 2018 as short-term interest rates rise further, which opens the possibility for an outright contraction in banks' noninterest-bearing deposits, though this could be mitigated by growth in low-cost interest-bearing alternatives, such as interest checking.

"The deposits held in noninterest-bearing accounts are at the heart of a typical banking relationship, forming a cornerstone or 'crown jewel' in banks' franchises," Moody's Senior Vice President Allen Tischler says. "Beyond paying no interest, the accounts generate fees for banks and present the opportunity to cross-sell other products and services to a comparatively loyal customer base."

Noninterest-bearing deposit growth is slowing across the board, particularly after the US Federal Reserve's three interest rate hikes in 2017. This raised the attractiveness of interest-bearing deposit and non-deposit alternatives. An analysis of the banks' average balance sheet data indicates that median noninterest-bearing deposit growth was just 1.7% for a group of 14 of the largest US banks in 2017, compared with a cumulative average growth rate (CAGR) of 5.1% for the five-year period from 2012 to 2017.

"Interestingly, despite their perceived deposit-gathering advantage, the biggest US banks, including JPMorgan Chase & Co. (A3 stable) and Bank of America Corporation (A3 stable), had average noninterest-bearing deposit growth below the group median both in 2017 and for the five-year period," Tischler says. "However, reflecting their focus on low-cost deposit gathering more generally, both banks reportered stronger interest-bearing deposit growth than the peer median in 2017, while still benefitting from an overall cost of interest-bearing deposits materially lower than the median."

Wells Fargo's average noninterest-bearing deposits grew at a rate close to the median in 2017, but the slowdown in its growth was steeper than most, suggesting reputational damage took some bite out of the bank's performance.

Only two of the 14 banks, KeyCorp (Baa1 stable) and Huntington (Baa1 stable), reported noninterest-bearing deposit growth in 2017 above their five-year CAGRs, but after adjusting for acquisitions, Moody's estimates that neither Key nor Huntington grew average noninterest-bearing deposits in 2017. Fifth Third Bancorp (Baa1 stable), experienced an outright contraction of 2.1% in its full-year average noninterest-bearing deposits during 2017.

BB&T Corporation and Regions Financial Corporation took credit positive steps by shifting their deposit bases toward noninterest-bearing funds in recent years. These two banks, and peers that also enjoy comparatively large noninterest-bearing deposit bases, are in a better position to benefit from further rate increases, assuming their deposit compositions remain generally the same.

Further incremental rate increases are widely anticipated in 2018 and will put further pressure on US banks' noninterest-bearing deposit growth. An outright contraction in noninterest-bearing deposits is likely at more banks as customers shift funds to interest-bearing accounts.

The report "Banks - United States: Slower noninterest-bearing deposit growth dulls luster of a key bank franchise strength," is available to Moody's subscribers at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1119130.

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NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Allen Tischler
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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