Retail banking is back in vogue. After the chicanery and overleveraging that characterized the housing-bubble era, consumer-facing financial institutions are once again prioritizing deposits in order to comply with new reserve capital requirements and insulate their operations against future economic turbulence.
Investors should therefore approach consumer deposit accounts with renewed interest, as product comparison not only enables one to find the best home for their cash, but also to potentially glean insights into each bank's market standing and prospects.
Deposit accounts & investing
Deposits are the lifeblood of the lending industry. The more cash a bank holds, the more active it can be as a lender and the more interest revenue it can therefore bring in to boost its balance sheet. And while big-name financial institutions are assured of a certain measure of business based on brand recognition alone, cost and transparency remain vital indicators of consumer perception, especially given lingering Main Street resentment of banks and heightened federal oversight.
"Price policy is especially important in the current situation, in which banks are searching for profits and growth opportunities and at the same time the relationship of trust between customers and banks is being redefined," according to a recent Duetsche Bank research paper on pricing, customer satisfaction, and profitability within the retail banking market. "Especially in view of the trend toward greater transparency there will also be a greater onus on banks to be convincing in communicating both their prices and the services that they provide."
Given that context as well as the fact that most consumers have savings accounts and certificates of deposit with the same institutions that handle their everyday banking needs, it's clear how savvy investors can unearth a number of useful data points from a pair of recent WalletHub reports on the checking account market.
WalletHub's 2013 Checking Account Transparency Report examined the ease with which consumers can find and digest information about key account terms on the websites of the 25 largest consumer-facing banks in the U.S., while its 2013 Checking Account Cost Comparison Report determined how much a basic checking account from each of these banks would cost under scenarios designed to mimic the use of five distinct types of consumers. In addition to revealing that the average checking account has 30 different fees and can cost more than $700 annually in certain circumstances, these studies unearthed a clear institutional hierarchy in the checking account space.
For starters, only one institution – JPMorgan Chase (NYSE:JPM) – ranked in the top 10 for each of the six categories that WalletHub evaluated (transparency, plus five cost metrics). Three others – Bank of America (NYSE:BAC), USAA Federal, and Citi (NYSE:C) – placed in the top 10 in five of the six categories, and another three – Capital One (NYSE:COF), Union Bank (NasdaqOTH: UNB), and PNC (NYSE:PNC) – received top marks in four categories.
On the other end of the spectrum, M&T Bank (NYSE: MTB) and First Republic Bank (NYSE: FRC) both ranked in the bottom 10 for five of the six categories, while Key Bank (NYSE: KEY) and Citizens Bank (NASDAQ: CIZN) each garnered that dubious distinction in four categories. A large contingent of institutions also placed in the bottom 10 for three of the six categories that WalletHub considered, including: Huntington Bank (NASDAQ: HBAN), Sovereign Bank (NYSE: SOV), Comerica Bank (NYSE: CMA), Bank of the West (NASDAQOTH: BNPQY), Compass Bank (NYSE: BBVA), Fifth Third Bank (NASDAQ: FITB), Regions Bank (NYSE: RF), TD Bank (NYSE: TD), and BB&T (NYSE: BBT).
WalletHub's reports offer a number of interesting takeaways for investors looking to gauge the relative prospects for bank stocks as the economy improves and high-revenue lending opportunities foster growth within the financial sector:
1. Despite the recent controversy surrounding the company, Chase is uniquely positioned to dominate the consumer lending space as the economic recovery continues and interest rates ultimately begin to rise, given its competitive deposit account offerings and large cash position. At 61%, JPM had the lowest loan-to-deposit ratio of any major bank in 2012, according to Credit Suisse Group AG data.
2. Bank of America and Citi have also displayed significant reductions in their loan-to-deposit ratios and boast strong consumer checking options. These two institutions therefore appear to be in good shape to grow as the consumer lending markets become more active, despite lingering financial and regulatory issues from the housing market collapse.
3. Union Bank and PNC lead the pack of regional consumer players – a market segment that has garnered a lot of investor attention in recent months.
4. Capital One's attractive deposit-based products as well as its underwriting sophistication – it was the only major bank to see its credit card division turn a profit during the worst of the Great Recession – make it a formidable force in the consumer lending space.
5. One of the trendiest small-cap banking plays, Key Bank, must improve its deposit account offerings if it is to maximize its lending capabilities as the economy recovers.
6. While the appeal of both M&T Bank and First Republic Bank is based primarily on their potential for national expansion, these two companies need to improve their deposit offerings in order to attract consumers on a bigger stage.
7. Depending on your perspective, Citizens Bank's relatively weak consumer banking products may be a reason to doubt TD Bank even more (TD Bank, which itself fared poorly in WalletHub's reports, is reportedly interested in acquiring Citizens). Alternatively, one could argue that both companies have an opportunity for a turnaround – either independently or through a merger.
Ultimately, even if insights into the everyday consumer banking space don't ultimately affect how you play the financial sector, they can certainly help you save money on your own cash management.