Between the banking crisis in March and the high-interest-rate environment, many banks are seeing low-cost deposits head for the exits, and are having to replace them with higher-cost deposits and funding sources. And that's hurting their margins.
But the tech-forward lender Customers Bancorp (CUBI -0.56%), based in eastern Pennsylvania, saw the exact opposite in the first quarter of the year, adding a significant amount of new noninterest-bearing (NIB) deposits -- meaning those the bank pays no interest on -- which helped its net interest margin (NIM).
In short, Customers benefited from the banking crisis. Now the big question is how durable these deposits will be. Let's take a look.
Image source: Getty Images.
Crypto deposits?
On a period-end basis, Customers increased NIB deposits by roughly $1.6 billion, which is an anomaly in the industry right now. Still, total deposits declined in the quarter as management chose not to retain higher-cost deposits.
The bank's core NIM, which is essentially the difference between what the bank makes on interest-earning assets such as loans and pays out on interest-bearing liabilities such as deposits, did fall slightly by 0.07 percentage point in the quarter. But that was really because it chose to hold higher cash balances and liquidity to better manage the difficult environment. The bank now expects to widen its NIM throughout the year, which is something that could be difficult for many banks to do this year.
But there is a bit of a catch to the deposit growth. Customers is one of a few banks that operates a real-time payments network that tends to attract crypto clients. Although the bank doesn't hold or trade cryptocurrencies, the payments network clears and settles fiat transactions in real time, which is an attractive proposition for crypto exchanges and other clients dealing with cryptocurrencies, which trade around the clock.
The other two banks that used to dominate this niche, Silvergate Capital and Signature Bank, collapsed in March during the banking crisis, and there's good reason to believe they may have been facing regulatory scrutiny due to their real-time payments networks that supported crypto clients.
Customers Bancorp Chief Executive Officer Sam Sidhu confirmed that most of the NIB deposits the bank added in the quarter were related to the bank's real-time payments network. Furthermore, an article from Fortune reported that after the collapse of Signature, the company Circle, which issues the stablecoin USD Coin, had moved to Customers for real-time settlement -- so there's a good chance that a bunch of the new NIB deposits the bank added in the quarter are from Circle.
Balancing risk and momentum
Although crypto deposits were a big part of the outflows at Silvergate and Signature, Customers still has limited exposure. Deposits from its real-time payments network were little changed in the first quarter from the prior quarter at $2.25 billion, which is roughly 13% of total deposits.
Furthermore, Sidhu indicated that because crypto-related deposits are so volatile it makes sense to not invest most of them and keep them largely liquid. Sidhu also said the bank doesn't expect to really expand this business.
But Customers continues to see opportunities to scoop up other deposit relationships in the wake of the banking crisis. Sidhu said that in April the bank added "several hundred million" of deposits related to Customers' other businesses, including fund finance, tech and venture capital, its financial institutions group business, and its digital bank. Sidhu also said that the bank's deposit pipeline is roughly $2 billion, which is quite healthy for a bank with just $21.7 billion in assets.
The challenges that lie ahead
The big question for Customers is whether it can construct a deposit base that is stable and that investors trust. The bank doesn't really have a big retail network, but it gets a lot of its deposits from niche businesses. Investors are obviously very worried about how sticky these crypto, tech and venture deposits really are.
The good news is that at the end of the first quarter, an industry-leading 81% of Customers' deposits were insured by the Federal Deposit Insurance Corp. Furthermore, Customers has enough immediately available liquidity to cover 272% of its uninsured deposits, another industry-leading number, so the balance sheet is in great shape from a liquidity perspective.
As the bank grows, the challenge will be to create enough diversity among the various niches it serves so there is low concentration and less volatility among its deposit base. It's no guarantee, but with the bank trading at just 55% of its tangible book value or net worth, and projecting a return on equity of 15% or more this year, while also planning to build significant levels of capital, I think this presents a good risk-reward entry point for the stock.
