ABA Banking Journal - June 2007 - (Page 52)
INVESTMENT SALES Exhibit 2 Disintermediation by program maturity Percent of investment sales funded by bankís own deposits Exhibit 3 Impact of investment sales on deposit base: 2005 0.96% S Because investment sales are very small relative to institution’s deposit base, even the impact of gross disintermediation is small — loss of less than 1% of retail deposits per year ALL CHARTS BY PHILIP DESIERE 34 35 35 23 20 0.77% S Impact is even smaller when you take into account money leaving anyway and deposits referred by brokers 0.26% S Investment sales cannibalize two-tenths of 1% of core deposit base annually Gross less than 5 years 5 to 8 years 9 to 12 years 13 to 14 years over 14 years True Net of referred deposits In 2005, investment sales staff in these banks received 3.9 referrals from banking staff for every referral they made to the bank, down from 4.5 in 2004. While the average broker received 178 referrals a year from the bank, that broker made 33 referrals to the bank, less than three per month. Only 31% of the banks studied track the dollar amount of deposits acquired through referrals from investment staff, and only 21% monitor the loan balances derived from these referrals. While the flow of referrals from the investment sales staff is relatively small, the dollar amount of new deposits and closed loans is large relative to investment sales. For the banks that track this benchmark, the dollar amount of new deposit accounts opened is equal to 16% of the banks’ investment sales, on average. For the smaller number of institutions that are able to report the impact of referrals from investment sales staff on closed loans, the new loan balances amounted to 6% of those banks’ investment sales. We can bring all of these factors together to estimate the overall impact of investment sales on deposits on a pro forma basis. For the banks that track intercepted funds, 30% of investment sales are paid for by drawing down the bank’s own deposits. But 20% of those disintermediated deposits are estimated to be leaving anyway, by the banks’ own reckoning. Thus true disintermediation is only 80% of 30%, or 24% of investment sales. If we subtract the loans and deposits that result from the referrals from investment sales staff, which amount to 22% of investment sales in the banks that track these benchmarks, we are left with a negligible amount of net disintermediation—about 2% of investment sales. When we performed the same calculations for 2004, we found that net disintermediation was slightly negative, i.e., investment sales that year actually intermediated deposits somewhat. Impact on a bank’s deposit base The disintermediation rate is the share of a bank’s investment sales that are funded by the bank’s own deposits. That is not the same as the percentage of a bank’s deposits that are disintermediated by investment sales, because the annual investment sales in a bank tend to be a small fraction of a bank’s deposits. For example, in 2005, bank investment sales averaged 3.2% of bank retail deposits, but gross disintermediated deposits averaged less than 1% of a bank’s retail deposits (30% of 3.2%). The true disintermediated dollars, after accounting for money that was leaving the bank anyway, amounted to just 0.77% of the average bank’s retail deposits (80% of 0.96%). Netting out the deposits brought in by referrals from investment sales staff reduces the disintermediated deposits to just 0.26 % (0.77% minus 16% of 3.2%). And netting out some value for the loan balances acquired reduces the drain on a bank’s deposit base to negligible levels [Exhibit 3]. Other issues examined by the full study include: To what extent do customers who buy investments where they bank replenish the disintermediated deposits over time? What is the relative profitability of investment sales and bank deposits? What factors influence the extent to which investment sales cannibalize deposits? What are the ways that can help a bank better control disintermediation? BJ Disintermediation Scorecard Inside source of funds* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30% Minus money leaving anyway . . . . . . . . . . . . . . . . . . . 20% of 30% Equals true disintermediation . . . . . . . . . . . . . . . . . . . . . . . . . . 24% Minus deposits and loans referred back to financial institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22% Net disintermediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2% *For banks that track intercepted money Referral Scorecard S In 2005 banks made 3.9 referrals to their brokerage units for every referral from brokerage to the bank. S Average broker received 178 referrals from the bank, down from 195 in 2004. S Average broker provided 33 referrals to bank, up from 29 in 2004. 52 JUNE 2007/ABA BANKING JOURNAL www.ababj.com/subscribe.html
Table of Contents for the Digital Edition of ABA Banking Journal - June 2007
Grow Your Wealth Management Share
Segment Marketing: Dull, Basic, Do It!
Snapshot: Hint of Margin Relief?
Sleight of Mind
ABA Chairman's Position
Getting Over the $1 Billion Speed Bump
"Naming Right" - worth it?
Top Performing Community Banks
Case Study: Seattle Savings Bank
Case Study: Utah Community Bank
Case Study: Woodforest National Bank
When Lawyers Want the Needle In Your Haystack. Or the Whole Stack
Deposits vs. Investments: Time to Settle this Debate
Punching Through the Media Clutter
Today's Elements, Tomorrow's Branch
Risk Focuses Security Dollars
Sourcing Solution Gives National City Purchasing Clarity
Getting Into Remote Capture? Don't Forget Compliance
To Advertiser/Index of Advertisers
ABA Banking Journal - June 2007