# Calculation for WACC for commercial banks

Commerical banks have a large weightage of debt from deposits, which has a very low interest rate. This caused our calculated WACC to be very low. Is this correct? https://docs.google.com/spreadsheets/d/1Cq2qiVEetbNP65fYnxYvJsfViBKLNT8p5GW0GkMkhGc/edit#gid=416987316

Or should we omit customer deposits from our calculation of WACC? Sites like Gurufocus cite a more reasonable value for WACC at around 5% - 12%, which disagrees with our calculations.

You should definitely omit deposits in my view. The calculation of WACC is based on equity capital and debt capital that a firm uses to fund itself. Banks are not allowed to use customer deposits to fund themselves (I think you would not agree that your local bank uses your deposits to fund itself, while paying you sub 1%)

It depends what you meant by “bank”. For example in the case of Bank of America, the deposit taking entity is Bank of America NA (BANA) which is a wholly owned subsidiary of Bank of America Corp (BAC). The latter does not take deposits , but it issues most of the unsecured debt and it is the issuer of the listed equity of the company. Hence the WACC of BAC does not contain deposits. The WACC of BANA does contain deposits, and it is a highly regulated entity with a lower WACC than BAC.

The traditional definition of "capital" is that used by Basel for regulatory purposes. In this sense retail (or commercial) deposits are not capital. Capital is generally speaking ordinary share capital plus retained earnings.

A bank can acquire new regulatory capital by issuing new equity or witholding dividends and therefore retaining more cash as earnings.

Additional Tier 1 Capital can be acquired by raising funds through T1 bonds, which are sufficiently subordinated debt as permitted by Basel.

Retail (or commercial) deposits are no where near subordinated enough to be classified as capital. Plus they are technically, immediately due liabilities meaning the notion of them being treated as capital is frivolous since a simple bank run would deplete this resource.