Wells Fargo's Deposit Base Is Rising, But Continues Outperforming Peers

Throughout 2022, Wells Fargo (WFC -1.11%) paid a smaller amount of interest on its deposit base than its peers.

Investors look for banks with lower-cost deposit bases because they are not as reactionary when the Federal Reserve raises its benchmark lending rate, aka the federal funds rate. The banks with the lowest deposit costs can fund loans and securities cheaper and make more money on the spread, which can be seen in a key bank revenue line item called net interest income (NII). Banks with lower deposit costs and more NII should outperform in 2023.

In the fourth quarter, Wells Fargo had to pay up more on its deposits, but continued to outperform its large bank peers. Let's take a look.

How deposit betas performed

An easy way for retail investors to look at how a bank's deposit base is performing is by looking at a bank's deposit betas, which essentially examines how much a bank raises its deposit costs in response to the Fed raising the federal funds rate over a given period of time.

So, if the Fed raises interest rates by 75 basis points (1 bps = 0.01%) and a bank raises the cost of its deposits from 10 to 30 basis points, it would have a deposit beta of close to 27% (30-10/75). The lower the deposit base, the better, because it means a bank's deposits are stickier, which typically results from banks offering their customers value other than yield, whether it's simply a really good relationship or a specific product or service. 

Here's a look at how Wells Fargo's deposit betas performed in 2022 compared to its peers JPMorgan Chase, Bank of America, and Citigroup. I've also shown where deposit betas were through the third quarter of 2022, so you can see how they changed during the fourth quarter.

Data source: Company financial statements.

As you can see Wells Fargo continued to have the lowest deposit beta at the end of 2022, despite its deposit beta nearly doubling since Q3 when looking at it year-to-date. Bank of America normally has the best-performing deposit beta through the rate cycle.

However, Wells Fargo has been operating under an asset cap as punishment for its phony-accounts scandal that came to light in 2016, which prevents it from really growing its balance sheet. So, as other banks were awash in deposits over the last few years, Wells Fargo has had to be more choosy about which deposit customers it accepts at the bank, particularly on the wholesale side, which is more sensitive to rate moves. This likely enabled the bank to pick deposit customers that were less sensitive to rate hikes, which is why its betas have outperformed. 

However, as the chart above shows, JPMorgan actually saw the smallest move in its beta in the fourth quarter. Also, banks have seen total deposits decline as customers have sought higher rates elsewhere or rotated into higher-interest-bearing deposit accounts. Wells Fargo in the fourth quarter saw about $15 billion of deposits run off, while Bank of America only let about $8 billion of deposits run off.

Can Wells Fargo continue to outperform?

Wells Fargo has always had a solid deposit base because of its large commercial lending franchise, which typically includes customers with good deposits. But this year the bank has performed better than usual because of the asset cap and how that cap inadvertently allowed the bank to build a better -- albeit smaller -- deposit base.

As liquidity continues to dry up, I am not sure if Wells Fargo will continue to outperform, although Bank of America did surprisingly see the largest jump in its deposit beta in Q4. But I would keep monitoring these trends because deposit costs are a big part of NII, so the better the deposit betas the more money the bank will be able to earn this year.