Bank of America Pays Peanuts for Deposits, but the Money Keeps Flowing In

By Rachel Louise Ensign and Liz Hoffman Features Dow Jones Newswires

Bank of America Corp. is the stingiest of the big, U.S. banks. But its depositors don't seem to care.

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Last year, the bank paid an average of 0.08% for its interest-bearing deposits in the U.S. That was around half the rate paid by J.P. Morgan Chase & Co. or Wells Fargo & Co. and a fraction of what firms such as Goldman Sachs Group Inc. and Ally Financial Inc. paid.

Yet Bank of America kept raking in customers' money. Such deposits increased $33 billion over 2015.

Bank of America's ability to keep paying next to nothing highlights the built-in advantages of big banks as well as changes in consumer attitudes toward deposits. For investors, it indicates some banks may be able to raise rates more slowly than in past Federal Reserve rate-hiking cycles, bolstering profits.

Indeed, Bank of America's low deposit costs helped boost its profit margins and played a part in pushing the bank to a 40% first-quarter profit increase from a year earlier.

While the Federal Reserve raised rates again in the quarter, the trend didn't change for Bank of America. Its average cost of U.S., interest-bearing deposits was just 0.09% and deposits in its consumer-banking business increased by a further $29 billion from the fourth quarter, according to the bank's quarterly earnings presentation.

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And Bank of America's interest payout came in below Goldman's $828 million expense or the $822 million Ally forked out -- even though those banks have just $115 billion and $79 billion of deposits, respectively.

Consumers clearly could make more by putting their money elsewhere. Had Bank of America customers moved all their money to J.P. Morgan, they would have made $700 million more at its average deposit-cost rate. Move it all to Goldman and they would have pocketed $5.1 billion more.

That they haven't moved money elsewhere speaks to the stickiness of deposits. It also bolsters a central argument by banks in the face of calls they should be broken up: Customers value their breadth and the different services they offer.

Bank of America, for example, had 4,559 branches in the U.S. and 15,939 ATMs at the end of the first quarter. Goldman Sachs Bank USA, on the other hand, has no ATMs and retail customers can't walk into a Goldman branch.

Indeed, depositors place a premium on convenience, like being able to access thousands of ATMs or transfer money using their smartphones.

Abby Trexler of New York has kept savings and checking accounts at J.P. Morgan Chase for more than a decade and says she has no plans to move them to a higher-yielding account. A number of years ago, she had an account with an online bank and found it cumbersome to get money in and out.

Ms. Trexler, who is in her mid-30s and works in communications, likes Chase's ubiquitous ATMs and mobile technology. For instance, she and her sisters used the bank's payments feature to split the cost of their parents' Christmas gifts last year.

"There are people like me willing to give up a little bit," Ms. Trexler said. "It just seems like such a hassle to not be able to walk in on every corner and get done what I need to get done."

Younger consumers also prefer the largest U.S. banks because they think their technology is better, said Jim Miller, senior director at market-research firm J.D. Power. Customers under 40 give the bigger banks higher satisfaction marks for things like mobile banking. This age group is particularly important to keep happy because they are five times more likely to switch banks than older customers, according to J.D. Power research.

Another factor working in the big banks' favor: They serve a lot of depositors with small accounts. For those savers, gains from switching to a higher-yielding account typically aren't worth the hassle, especially in an age of superlow rates.

Say a depositor has $3,000 in a standard Bank of America savings account. On the face of it, that person could gain a lot by moving from such an account, which typically pays about 0.01%, to GS Bank, which offers a savings account with a 1.05% yield.

The practical impact is far smaller: the gain, over a year, from switching would only be around $31.

In the face of that, many bank customers, especially younger ones, have stopped shopping around for deposit rates as they did before the Fed took rates to near-zero levels.

"They don't even think about interest rates for deposits because it's never been anything they could make any money off of," said J.D. Power's Mr. Miller. Even including the higher-rate offers from banks like Goldman Sachs, "the rates are so low that you almost think of it as no rate at all."

Write to Rachel Louise Ensign at rachel.ensign@wsj.com and Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

May 08, 2017 05:44 ET (09:44 GMT)