The Biggest U.S. Banks Continue To Grow: Good News Or Bad News?

A report released by financial information firm SNL Financial last week reveals that the country’s five largest banks have steadily increased their share of the industry’s total assets over the last 6 years – growing from 38.4% in 2007 to 44.2% in 2013. ^[1] To put things in perspective, there were 6,891 banks with $14.6 trillion in assets at the end of Q3 2013 according to FDIC records, and the top five banks were responsible for $6.5 trillion of these assets. This does not bode well for financial watchdogs who have worked hard since the economic downturn of 2008 to ensure that a failure of one of these ‘Too Big To Fail’ (TBTF) banks does not hit the economy at large. So does this mean that the string of regulations implemented over recent years have been ineffective?

Not quite. After all, a major reason for this jump in market share is the high-level consolidation that took place in the industry at the peak of the economic crisis. Stricter regulation has undoubtedly curbed the pace at which these banks grew. But then it must also be remembered that some restrictions are applicable across the industry, and the steady decline in the number of banks and thrifts in the country over the years does not really help customer confidence in the smaller players.

A good proxy for the size of a bank’s assets is its deposit base, and a review of the changes in a bank’s deposits over a period of time can help understand the bank’s growth trajectory over the period. In this article, we compare the average deposits each of the country’s five largest banks – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) – over the last three years and also provide an outlook for the figures.

See the full Trefis analysis for Wells Fargo | JPMorgan | U.S. Bancorp | Bank of America| Citigroup

The table below shows the average value of all deposits the five banks held each quarter over the last eleven quarters. The data has been compiled using figures reported by individual banks as part of their quarterly announcements and include both interest-bearing and non-interest-bearing deposits.

JPMorgan leads the pack by a decent margin with $1.2 trillion worth of customer deposits across its global branch network. Having grabbed the top spot from Bank of America by the end of Q3 2011, the diversified financial firm has continued to grow steadily each quarter. That’s a 30% jump in deposits over the 11-quarter period – a commendable feat given the sheer size of its deposit base. The only other bank to come close in terms of similar growth is Wells Fargo, with deposits rising 27% over the period.

One thing JPMorgan and Wells Fargo have in common is that both of these banks managed to get through the economic downturn largely unscathed. In fact, both of them swelled in size thanks to the acquisitions of Bear Sterns and Wachovia, respectively, at the peak of the downturn. It is likely not a coincidence that in the years that followed people chose to park their cash with these banks: their track record makes them stand out among other banks such as Bank of America and Citigroup who have faced (and continue to face) the largest losses over the period and are still hard at work cleaning up their balance sheets.

In short, the more customers trust a bank, the more you would expect its deposit base to grow- which in turn translates into a higher asset base for the bank. This makes even more sense in the current low-interest environment, as the lack of many lucrative retail investment options makes bank deposits a good, safe bet for many people. Add to this the fact that consolidation and bankruptcy in the banking industry brought the number of banks and thrifts in the country to an all-time low last year. ^[1] So someone looking to open a deposit would prefer to stick to one of the larger banks which are tracked very closely by regulators. That should explain why the asset base at the country’s largest banks is growing faster than that for smaller players.

So will this trend continue in the future too? We don’t think so. The current growth in asset base at banks is rather inflated due to prevalent low interest rates. Once the Fed frees up interest rates in the near future, growth in the banks’ deposit base (and consequently the asset base) will likely slow down. We capture this in our analysis of JPMorgan as shown in the chart below.

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1. Biggest Lenders Keep On Growing, The Wall Street Journal, Jan 3 2013 [↩] [↩]