Why Wells Fargo Will Soon Have The Largest Deposit Base Among U.S. Banks

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The total deposits held by all commercial banks in the country has doubled over the last decade – jumping from $5 trillion in late 2004 to cross the $10-trillion figure for the first time this March. ((Assets and Liabilities of Commercial Banks in the United States (Weekly) – H.8, Federal Reserve Website)) While a steady growth in deposits is expected over time, the growth rate over this period has been notably high – something that can be largely attributed to the low interest rate environment that has persisted since the economic downturn of 2008. With not too many lucrative investment options around, individual and institutional investors have shifted a bulk of their assets into deposits over recent years. This, in turn, has resulted in shrinking net interest margins for the banks as their interest expenses have grown in proportion with the deposits, even as their interest income remains under pressure.

This article details the changes in deposits at the country’s four largest banks – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) – over the last three years. Notably, JPMorgan overthrew Bank of America to become the bank with most deposits in late 2011. But given the rapid growth in deposits for Wells Fargo over the same period as well as its international expansion plan, JPMorgan may lose its position at the top in the near future.

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See the full Trefis analysis for Wells FargoJPMorganU.S. BancorpBank of AmericaCitigroup

The following table shows the average quarterly value of all deposits held by these four banks over the last twelve quarters. The data has been compiled using figures reported by individual banks as part of their quarterly announcements and includes both interest-bearing and non-interest-bearing deposits.

(in $ billions) Q3’11 Q4’11 Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14
JPMorgan 1,038.5 1,097.0 1,098.5 1,093.2 1,098.0 1,133.5 1,143.8 1,173.6 1,196.7 1,241.3 1,244.3 1,244.0
Wells Fargo 910.3 945.4 949.5 961.5 988.3 1,022.9 1,040.7 1,069.3 1,090.3 1,129.0 1,143.2 1,170.9
Bank of America 1,051.3 1,032.5 1,030.1 1,032.9 1,049.7 1,078.1 1,075.3 1,080.0 1,090.6 1,112.7 1,118.2 1,128.6
Citigroup 860.5 857.0 869.1 893.4 921.2 928.9 920.4 924.5 922.1 956.4 957.4 959.5

One thing that stands out from the table above is the share of these four banks of the country’s deposits. At the end of Q2 2014, the banks had a little less than $4.5 trillion in deposits among them – 45% of the $10.2 trillion in total deposits for all commercial banks. The fact that the total size of deposits for the fifth largest commercial bank – U.S.Bancorp – is just $262 billion should make it quite clear how strong a grip these banks have on the country’s banking industry.

JPMorgan leads the pack by a decent margin with over $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 giant accounts for about 12.5% of all deposits in the country. The only quarter in which the bank reported a sizable decline – Q2 2012 – is when it revealed a multi-billion dollar loss from the London Whale incident. The steady growth in its deposit-base since then shows that customers did not take much time to put the debacle behind them. Over the last three years, JPMorgan has seen deposits grow at an annual average rate of 8.3% – a remarkable feat considering the sheer size of the bank’s existing deposit base.

JPMorgan’s exceptional growth rate is rivaled only by Wells Fargo, which saw deposits grow an average of 10.2% annually over the same period. Wells Fargo came out of the economic downturn without any major legal trouble despite having swelled in size from its acquisition of Wachovia. The bank also gained from the mortgage refinance wave, as thousands of customers who switched to Wells Fargo’s mortgage offerings also moved their deposit accounts to the bank. This helped the bank cement the second position in the list – overthrowing Bank of America from the spot late last year.

This brings us to the question: Is Wells Fargo’s business model capable of grabbing the top spot in the list? We believe that it is, and will very likely grow to become the largest U.S. bank in terms of deposits by mid-2016. We draw this conclusion based on two factors: Wells Fargo’s considerably higher growth rate compared to JPMorgan over the last three quarters, and Wells Fargo’s decision to expand its international business in the near future.

The reason JPMorgan’s deposit base has remained almost stagnant over the last three quarters is that the Fed’s decision to taper its asset purchase program has eased the pressure on interest rates to a small extent – giving investors a reason to move cash out of interest-earning deposits to other higher-return investment options. As this phenomenon should have equally affected all the banks over the period, the continued growth in Wells Fargo’s deposit base points to a stable and organic growth in its customer base – something we believe will remain unchanged over coming years. Also, Wells Fargo’s strategy for future growth focuses on aggressive international expansion (see Wells Fargo’s Growing Footprint In U.K. Is Good News).

This will continue to fuel a growth in deposits over the foreseeable future at a rate we believe will be higher than that for JPMorgan. We estimate a 1.5% quarter-on-quarter growth in deposits for JPMorgan, compared to a growth of 2.5% Q-on-Q for Wells Fargo. Using these figures, we project a deposit base of $1.4 trillion for both the banks in the first half of 2016, with Wells Fargo edging ahead of JPMorgan.

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