Understanding Brokered Deposits

An indicator of bank health that investors need to be aware of is the amount of a bank's brokered deposits compared with asset growth. This issue is most germane for banks that are smaller than the big four money centers as measured by assets under management. Most of the banks in this group are publicly traded. They are known as national, super-regional and regional banks, and they include 138 U.S. banks that have assets of between $5 billion and $100 billion. This group relies on brokered deposits to a far greater extent than the money centers or the smaller banks. The money centers average about 3% of deposits from brokers, and banks that have less than $5 billion average about 4%. For banks in the range of $5 billion to $100 billion, the average is about 14%. Brokered deposits are acquired through brokers that represent investment clients who are seeking the greatest return possible on FDIC-insured bank certificates of deposit. In general, brokered deposits supply higher rates of return to depositors than those offered directly by banks, which are called core deposits. Banks access brokered deposits when their ability to attract deposits directly is limited, or when they are willing and able to make more loans than their existing core deposits can support. High levels of brokered deposits were a contributing factor in both the savings and loan crisis of the late 1980s and the most recent financial crisis. As a result, many investors view high levels of brokered deposits as indicating weak or overly aggressive banks. This is not necessarily the case, however. Many large banks have chosen to access deposits through brokers as a means of reducing the internal expenses associated with direct marketing. At Morgan Stanley (MS) almost 100% of the deposits are classified as brokered. At Goldman Sachs (GS) it's over 50%, and at American Express (AXP) and Discover Financial Services (DFS) it's over 40%. In comparison, the percentage of deposits classified as brokered at the big four U.S. money centers are as follows: JPMorgan (JPM), 1%, Wells Fargo (WFC) 2%, Bank of America (BAC) 5% and Citigroup (C) 7%. The problematic issues in the past have been the result of some banks increasingly accessing brokered deposits for the purposes of funding increasingly aggressive loan growth, usually involving real estate transactions. Since the latest financial crisis, this issue has been diminishing as most banks are more focused on clearing their residual loan problems than in making more loans. Right now, though, two publicly traded banks are exhibiting the early signs of accessing brokered deposits to support more aggressive lending: Toronto-Dominion (TD) and New York Community Bancorp (NYCB). That does not mean they are in trouble or even that they will be. It is probably more indicative of strength as they seek to exploit their competitors' lack of interest in making loans and moving to support lending by acquiring brokered deposits. Toronto-Dominion has consistently been involved in accessing brokered deposits and has increased its percentage of brokered deposits from about 30% four years ago to about 36% today. It is using these deposits to expand its lending for residential and commercial mortgages, as well as auto and commercial and industrial loans. New York Community Bancorp has increased its percentage of brokered deposits from about 13% four years ago to about 20% currently. It is using these deposits to lend on multi-family and commercial real estate in the New York City area.

Understanding Brokered Deposits

For investors in regional banks, brokered deposits can be a warning sign, but not always.

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