Canadian banks will see consumer deposit growth revert to more normal single-digit levels as financial market conditions improve, rating agency DBRS Ltd. said Wednesday.

“Following a short-lived period of phenomenally strong double-digit deposit growth, the long-term trend of mid-single digit expansion is expected to return,” DBRS says in a research note.

Despite the expected growth slowdown, the firm observes that the percentage of loans and bankers’ acceptances funded with deposits has improved over the last 10 years, “which is positive for the Canadian banks’ funding profiles”.

DBRS reports that, over the last 20 years, consumer deposits have, on average, grown at approximately 5% annually (excluding acquisitions). However, tougher competition, and disintermediation, pushed the rate to a low of 2% in 2003.

“The introduction of high rate saving accounts by the banks has helped to stem some of this deterioration,” it says, but more recently, deposit growth picked up even further in the wake of the global credit crisis. “With the rapid deterioration in equity and debt markets, consumers re-evaluated risk tolerances, resulting in a significant amount of withdrawals from long-term investment funds. Given the low return on money market funds due to the low interest rate environment and a flight to quality, the large five Canadian banks benefited, as a portion of these withdrawals were placed into bank deposits,” it says.

Now, however, some of this capital has started flowing back into long-term mutual funds at the expense of bank deposit growth, DBRS suggests. “As such, the rate of deposit growth is expected to converge to more historical norms in 2010, barring any major deterioration in the global economies and markets,” it predicts.

DBRS anticipates that some of these new deposits will remain with the banks, and it says that the clear winner has been TD Bank with a deposit growth rate of 16% in 2009, compared with Bank of Montreal, CIBC and Royal Bank of Canada, which all had a 9% to 10% growth rate over the same period of time.

And, it adds that the absolute level of consumer deposits is expected to remain high. “The Canadian banks continue to actively focus on expanding their consumer deposit base as it provides the banks with opportunities to cross-sell other products and improve the profitability of each client. As well, core individual deposits at the banks provide a stable source of funding, which is relatively sticky, particularly during periods when markets are under pressure,” it says.

IE