Money flowing out of volatile, down trending equity markets portends major changes for banks as investors seek refuge in federally insured deposits, according to Invictus Consulting Group LLC, which provides stress test analyses for banks.
According to FDIC data, over the past year, more than $1 trillion has moved into bank deposits despite historically low interest rates. “This is a clear indication of a shift to safety and preservation of wealth at the expense of new spending," says Todd DellaCamera, a Managing Director at Invictus.
“This flow of refugee money will have profound implications for the sustainability of some US banks, particularly smaller community institutions,” he adds. “Because of the recession-induced lack of lending opportunities, this increase in deposits, when combined with maturing lending assets, can only be redeployed to lower yielding cash and investment portfolios. It will place a serious strain on bank earnings and return on capital. These trends will cause banks to face increasingly stressed balance sheets, where strategic management is paramount to survival.”
The good news for banks: Liquidity will increase; cost of deposits will drop; and dependence on riskier liabilities, such as brokered deposits or repurchase agreements, will fall. The bad news: Higher costs due to increased need for deposit insurance, less value ascribed to deposits, and less need for deposit-gathering branches, resulting in closings and layoffs.
Specifically, Invictus anticipates:
The shift to deposits is having profound implications for strategic management and the sustainability of some US banks, according to Kamal Mustafa, Invictus CEO. “These trends will create both opportunities and potential stresses that must be taken into consideration by managements and those, like investors, with vested interests in banks. The Invictus stress model has been adapted to address these issues. Our team will be monitoring these trends going forward to more precisely quantify their impact.”
Invictus (www.invictusgrp.com) was established in 2009 as an independent financial risk management and advisory firm. The Invictus senior management team has a depth of experience in international banking, regulation, information technology, credit, liability management securitization, insurance and investment banking. They recognized that today’s difficult global economic environment renders traditional analytical methods inadequate to evaluate a bank’s capital requirements – and have created a new and superior methodology for the financial services industry that generates a range of analytical reports providing unprecedented insight into the banking sector. Invictus’ advisory services are competitive positioning, merger and acquisition screening, and risk analysis among others.