Fitch: Finance Companies Risk Deposit Outflows as Rates Rise
The increased use of deposits as a funding source for U.S. finance companies diversifies their funding profiles but, in a rising rate environment, also introduces outflow risk that can affect the funding of business activities, according Fitch Ratings.
Outflow sensitivity is expected to be more significant for finance companies relative to traditional banks given that their deposit platforms are relatively new, tend to lack long-term customer relationships, and are predominantly centered on gathering deposits online.
As part of this analysis, Fitch reviewed the U.S. deposit platforms of the six large deposit-taking U.S. finance companies, representing approximately $191 billion of aggregate deposits as of Sept. 30, 2013: Ally Financial (Ally), American Express Company (Amex), CIT Group (CIT), Discover Financial Services (Discover), General Electric Capital Corp. (GE Capital) and SLM Corporation (Sallie Mae).
Of the institutions reviewed, Fitch believes Ally’s deposit platform is best positioned to withstand a rate rise give its focus on low balance retail time deposits, while not offering an above-market interest rate. The other institutions exhibit a combination of deposit sensitivities and offsetting factors, with no company being at material risk, according to Fitch’s review.
Fitch does not expect the financial profiles of finance companies to be materially affected by potential deposit attrition in a rising rate environment. Finance companies can seek to stabilize deposits by increasing their offered rates, although this comes with its own costs and risks.
On the positive side, Fitch noted that in a rising rate environment, finance companies could benefit from net interest margin expansion, at least over the near-term, to offset increase deposit costs.
The full report “FinCo Deposit Sensitivity to Rising Rates” is available at www.fitchratings.com.