Want Deposits? It Will Cost You
Financial services companies learn not to put all of their eggs in one basket amid securitization's downturn
June 26, 2009
Credit markets may have thawed but some venues of the financial markets remain clogged, so financial services firms have come to rely more what some may see as a quaint George-Bailey-of-Bedford Falls-era method of luring capital: offering high rates for deposits.
Consumers are saving more than they have in recent years as a result of the uncertainty about the employment picture and the housing market. Now, companies that don't fall into the traditional "bank" category hope to attract some of that savings to put it to work for loans to other consumers or businesses.
"Unfortunately, [consumers] have lost a lot of wealth. Their home values and their portfolios are not rising so they're being forced to save more." says Joe Lavorgna, chief U.S. economist at Deutsche Bank.
The change in attitudes about thrift among consumers comes at a time when financial services companies are undergoing a change in the way they consider their own finances. "You are seeing a change in mindset towards being more core funded," says Jefferson Harralson, an analyst at KBW who tracks the banking industry. Many firms want to be less "reliant on overnight money from wholesale sources. Liquidity has improved [but] most financial institutions want to fortify their balance sheets."
Some of the highest rates for deposits are being offered by Discover and Ally -- through their online bank products.
Ally, a bank holding company, has sprung from GMAC, the finance unit of General Motors Corp. Discover, meanwhile, is the credit card company spun off two years ago from Morgan Stanley.
Discover and GMAC are "offering highly competitive [certificate of deposit] rates to attract deposits quickly," according to Citigroup analysts, who noted in a June 22 report that, on average, these new competitors pay 2.50% compared with the 1.75% for traditional banks.
"Many of the names that were historically most reliant on the securitization markets have seen the difficulties that reliance has brought them," says Christopher Wolfe, managing director in the financial institutions group at Fitch Ratings.
Others to offer generous rates include PNC Bank, SunTrust, M&T Bank and Regions, as well as Capital One, according to the Citigroup report. "The lack of liquidity in the wholesale funding markets makes it even more important for banks to maintain their core deposit base by offering relatively attractive rates to their relationship accounts," say Citigroup analysts.
Wolfe says banks and financial services firms can attract depositors because the deposits are federally insured. Also, some firms offering high deposit rates can do so because they do not have facilities and are not saddled with large infrastructure costs that limit participants with a massive network of branches.
It is difficult to measure just how much money is saved by turning to depositors as opposed to selling loans into bonds, but Wolfe notes that in addition to the costs of actually going out and hiring a dealer firm to sell the bonds, there is a chance the bank cannot sell all of the tranches or classes of an asset-backed bond and is stuck holding them. That means the bank needs to set aside money to satisfy regulatory requirements. This inability to sell off all classes of an issue would have been unheard of in the go-go years of 2006 and early 2007, thanks to regular buying related to the creation of collateralized debt obligations. But, the current market for consumer debt is fragile.
While investor appetite for asset-backeds has returned from the moribund levels of fourth-quarter 2008 and issues pooling credit card receivables and auto loans will find buyers, transactions pooling home equity debt have not been seen at all this year. According to Asset Securitization Report, a sister publication of IDD, there has been no securitization of home equity debt this year or last year. That compares to $34.5 billion worth of deals completed in 2007.
So far this year, $19 billion of auto loan-backed bonds were sold, down from $35 billion sold last year and nearly $67 billion in 2007, according to the ASR Scorecards database. When it comes to securities pooling credit card receivables Wall Street dealers have managed to sell $20 billion worth of securities year-to-date, compared with $60 billion worth of card-backed debt in 2007 and $87 billion in 2008. "Transactions that are TALF eligible are getting done," says Dan Castro, portfolio manager at Huxley Capital Management.
According to Castro some deals eligible for the Term Asset-Backed Securities Loan Facility program have attracted such strong buyer interest that they are six to seven times oversubscribed. As he sees it, the drop in issuance of asset-backed debt is not just related to the plunge in demand from investors. Lending to consumers has plummeted due to more stringent standards and there is less collateral for deals.
This year, GMAC has completed no ABS deals, but last year it sold two offerings and in 2007 it completed seven issues. Discover, to date, has completed no new offerings, but it completed four last year and seven in 2007. "Some banks have been doing this for as much as a year," Harralson says of the higher rates for deposits, adding, "The crisis of the last year or two has proven that wholesale funding can dry up on you."
(c) 2009 Investment Dealers' Digest and SourceMedia, Inc. All Rights Reserved.
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