By David Henry
NEW YORK (Reuters) - Over the past five years, stock analysts have challenged JPMorgan Chase & Co <JPM.N> executives for keeping so many branches open as customers did more and more banking online.
Giving up real estate, the analysts said, was an obvious way the bank could save money when interest income was flagging and regulatory and legal costs were climbing.
But executives at the largest U.S. bank resisted. They argued that branches are great billboards for the Chase brand and essential to attracting people who want to open accounts or make major transactions in person.
Now it looks like the executives were right, or at least closer than other banks to delivering the right mix of physical and digital customer service.
JPMorgan has grown deposits over the last five years faster than major competitors and twice as fast as the industry, according to analysts at Bernstein Research.
Deposits in the Chase consumer bank grew in 2016 by 11 percent, or some $61 billion, the bank said when reporting quarterly results last week. Chase now has $607 billion in deposits, setting it up for a massive payoff if it can keep those funds and the company can lend them at higher interest rates in a stronger economy.
"We've been growing our deposits very strongly and we're going to enjoy the benefits,” Chief Financial Officer Marianne Lake said on Friday.
For the first time in roughly a decade, banks’ ability to gather deposits is poised to matter mightily to financial performance.
Interest rates are rising and the U.S. economy, which has been on the mend for a while, is expected to improve even more with stimulus from federal spending and tax cuts under the new government in Washington. Banks that did not take steps to grow deposits while loan demand was sluggish and interest rates were low may struggle to catch up in the coming years, experts said.
“JPMorgan has invested through the slower times,” said Mike Mayo, an analyst at CLSA who has questioned JPMorgan’s branch office strategy in the past.
“Now it's time for them to try to achieve a greater payoff.”
The full payoff is not a sure thing.
Loan demand and lending rates could fall short. The economy might become so strong that depositors put their money to better use. Or, lending could be so attractive that JPMorgan rivals lure deposits away with higher and higher rates. Wary of fickle customers, JPMorgan executives say they are not offering high rates for deposits in a widespread, indiscriminate manner. “We have among the lowest rates paid for deposits in the industry,” Lake said in a conference call with journalists on Friday. “We've been very disciplined.”
The Bernstein analysis concurred, finding that JPMorgan offers relatively little for deposits. Still, the bank has been using promotions to get more people in the door.
For example, in recent months, Chase has been mailing offers of a $500 cash payment to new depositors who meet certain conditions, such as holding at least $15,000 in a savings account for three months.
Such come-ons are a marketing expense and do not lower the profit margin the bank reports for its deposits, Lake said.
Chase’s consumer deposit profit margin has fallen for at least five years, reaching 1.8 percent in the fourth quarter, compared with 2.76 percent in the same period in 2011. It is difficult for outsiders to assess how customer-acquisition costs would depress that rate, or how many depositors lured through promotions will stay with the bank for the long haul, taking out the loans and paying the fees Chase expects.
Much of JPMorgan's deposit growth was born through mistakes, the financial crisis and sheer necessity.
Before 2007, Chase, like many banks, would lose a lot of customers each year because of poor service. Replacing them was expensive, but the churning expense could be covered by assorted fees, such as for overdrafts. That was sharply curtailed by post-crisis reform. Since then, banks have focused on better service to keep customers.
JPMorgan also took over Washington Mutual during the crisis. WaMu had a branch network full of holes in California and Florida, which Chase has tried to plug with new locations. Deposit growth has been a byproduct. Regulator demands that banks shore up funding has also been a factor. Deposits are more stable than short-term financing from capital markets, and new requirements on banks favor deposits from consumers.
A big chunk of Chase’s additional deposits have also come from the bank's push to gain more investment management business from “mass affluent” individuals, who may not be multi-millionaires but still have a meaningful level of household wealth. They are often Chase customers already, who open Chase Private Client accounts through branches and are offered perks for higher balances.
Perhaps the most substantial driver of Chase’s deposit growth? Sheer size and scale: it has more resources than competitors to spend to build up deposits. "It is about flexing their muscle," said Mayo.
(Reporting by David Henry in New York; Editing by Lauren Tara LaCapra and James Dalgleish)