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Running head: Fifth Third Bancorp 0
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Institutional Affiliate
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Fifth Third Bancorp (Bank)
Deposit Volatility Analysis
Fifth Third Bancorp is a banking corporation with its headquarters in Cincinnati in Ohio. It is a holding company of the Fifth Third bank. Amongst its main businesses are; commercial banking, consumer lending, advising, payments processing etc.
Being a depository institution, its major source of funding is therefore deposits. The corporation has various types of deposits that fund it. These include;
Deposits held in domestic offices and deposits held in foreign offices.
Deposits held in domestic offices entails deposits made by Individuals, partnerships and corporations, U.S. Government, States and political subdivisions in the U.S., commercial banks and other depository institutions in the U.S., Banks in foreign countries and foreign governments and official institutions.
The deposits held in foreign of are simply the deposits held in foreign subsidiaries of the corporation.
Interest bearing vs non-interest bearing deposits
Interest bearing deposits are deposits that have a rate of return to the customer for example thrift or savings deposits in non-transaction deposits and the Now accounts in transaction accounts. On the other hand, non-interest bearing deposits are deposits that have no rate of return to the customer most non-interest bearing deposits are held by business firms (Rose−Hudgins, 2008).
Core (Retail) deposits
These are deposits that are made in a bank’s natural demographic markets. They are the major source of funds for depository institutions. They are advantageous as they can be used to measure customer loyalty (the more the deposits the more the loyalty) and the cost of funding can also be determined since they use established rates of return. (Lamont Black, 2007)
Insured deposits
These are deposits of individuals that have a devoted fund to insuring them by the Federal Deposit Insurance Corporation. The devoted fund is paid back to individuals in the event of losing money due to a failure of a financial institution.
Brokered deposits
These are deposits placed by an individual or a firm who facilitates the placement of an investor’s deposits with the bank.
| FDIC - Statistics on Depository Institutions Report | ||||
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| BHC ID - 1070345 (See footnote 1) | All Institutions - National | BHC ID - 1070345 (See footnote 1) | All Institutions - National |
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| 12/31/2016 | 12/31/2016 | 12/31/2015 | 12/31/2015 |
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| % of Assets | % of Assets | % of Assets | % of Assets |
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| Average (W) |
| Average (W) |
| Number of institutions reporting | 5913 | 6182 | ||
| Number of bank holding companies reporting | N/A | N/A | ||
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| Total deposits | 76.88% | 76.84% | 77.54% | 76.34% |
| Deposits held in domestic offices | 76.43% | 69.41% | 76.96% | 68.30% |
| Deposits held in foreign offices | 0.45% | 7.43% | 0.58% | 8.05% |
| Total deposits | 76.88% | 76.84% | 77.54% | 76.34% |
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| Interest-bearing deposits( domestic) | 50.47% | 50.63% | 50.44% | 49.51% |
| Interest-bearing deposits(foreign) | 0.45% | 6.78% | 0.58% | 7.38% |
| Noninterest-bearing deposits(domestic) | 25.96% | 18.78% | 26.52% | 18.79% |
| Noninterest-bearing deposits(foreign) | 0.00% | 0.66% | 0.00% | 0.67% |
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| Total Deposits held in domestic offices | 76.43% | 69.41% | 76.96% | 68.30% |
| Demand deposits | 9.20% | 9.80% | 12.75% | 9.66% |
| NOW accounts | 1.53% | 2.23% | 2.77% | 2.28% |
| Money market deposit accounts (MMDAs) | 51.26% | 31.04% | 46.14% | 29.86% |
| Other savings deposits (excluding MMDAs) | 9.97% | 16.58% | 10.53% | 16.09% |
| Total time deposits | 4.47% | 9.75% | 4.77% | 10.41% |
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| Domestic office deposits(interest expense) | 0.15% | 0.18% | 0.14% | 0.16% |
| Foreign office deposits(interest expense) | 0.00% | 0.03% | 0.00% | 0.03% |
| Average interest cost on domestic office interest bearing deposits | 0.30% | 0.36% | 0.28% | 0.32% |
| Average interest cost on foreign office interest bearing deposits | 0.00% | 0.44% | 0.00% | 0.41% |
Based on the information above, Bancorp’s deposits has decreased over time. It has decreased by 0.66% between 2015 and 2016. In comparison to its peers, Bancorp relies more on deposits than its peers in the market. Despite this fact, Bancorp’s deposits decreased while those of its peers increased by 0.5%. This can be attributed to:
1. New competition for Bancorp.
As all these are depository institutions targeting the same market, competition is bound to arise causing a loss of market segment for one and a gain for the other. In Bancorp’s case, new competition could be from mutual funds or other credit institutions like SACCOs.
2. Decrease in loan demands
As loan demands makes the bank to seek more funds through deposits, a decrease therefore reduces the funds sought through deposits
3. Community bank interests.
Bancorp is offering little interest on deposits as compared to its peers for example in 2016, while Bancorp is offering 0.3% on domestic interest bearing deposits, its peers are offering 0.36% and 0.44% on foreign interest bearing deposits. As such, the peers attract more deposits as opposed to Bancorp as every customer seeks better returns.
From the data provided also we can be able to tell that the peer group has less volatile deposits as compared to Bancorp.
Bancorp has a large percentage of money market deposit accounts. These accounts have been classified as transaction accounts because they carry check-writing privileges (Rose−Hudgins, 2008). They are short term securities that may have maturity of only a few days, weeks or months therefore are prone to withdrawals than the savings deposits and the time deposits. This said, Bancorp has a higher percentage than its peers in terms of money market deposit accounts and a lesser percentage for time deposits and savings deposits this makes its deposits to be volatile.
Strategies and Recommendations for Managing Sources of Bank Funds
1. More competitive interest rates
The bank should increase the interest rates they offer for deposits in order to attract more deposits. This is because there are many depository institutions that investors can deposit their funds but the choice of an institution majorly depends on the interest that can be earned. Banks have a high profit margin from making loans and therefore can afford to increase their interest rates without denting their profit margins
2. Loan securitization and sales
In order to reduce risks associated with issuing loans, the bank can employ securitization and sale them a high interest rates to raise funds (James Harvey, 2001)
3. Increased services for the depositor
Offering better services will always attract customer loyalty and attract more depositors. This also includes setting up new ATMs at places convenient to the customers.
4. Supplementing Retail Banking -Product Development
The bank should develop and offer other services in order to be competitive to other banks and non- bank institutions. These services generally help maintain customer loyalty and also generate an extra source of funds for the bank. These services include: cash management services to customers, offering insurance etc.
5. Considering customer demographics
Bank deposits are affected by the demographics in that, as the population shifts towards a middle aged population mutual funds may become more popular (James Harvey, 2001) as people are saving towards retirement. In this light, the bank needs to come up with securities and services that attract this population
BibliographyJames Harvey, K. S. (2001). Financial Industry Perspectives. Decline in Core Deposits: What Can Banks Do, 38-43.
Lamont Black, D. H. (2007). Finance and Economics Discussion Series. Bank Core Deposits and the Mitigation of Monetary Policy.
Rose−Hudgins. (2008). V. Managing Sources of Funds for Banks and Their Principle Competitors. In Rose−Hudgins, Bank Management and Financial Services, Seventh Edition (pp. 387-413). McGraw-Hill.
