Deposits | ALCO | Loans | ALM Strategy | Analytics | MRM Framework
What if deposit pricing could be more of a science and less of an art form?
When I ask bankers how their teams make deposit pricing decisions, they often respond that they “follow their gut,” or that they “react to what competition is doing.”
Of course, taking into consideration local market pricing is a critical component in pricing decisions. But as the Fed continues to aggressively tighten, and deposit competition intensifies (expect it!), it is critical to take a more scientific approach.
The good news is that banks and credit unions sit on treasure troves of data, and more institutions are warehousing that data. But not all are transforming their data into actionable intelligence to help inform strategy. For example, deposit cannibalization will be one of the greatest risks to margin the deeper we get into this rising rate cycle. Being able to identify new money inflows vs. the cannibalization of lower-cost deposits into specials enables quick pivots on deposit decisions.
We believe that there are five essential data analyses for effective deposit management during this tightening cycle.
1) Revisit balance tiers.
According to Darling Consulting Group’s Deposits360°® online analytics solution (supporting 250 institutions, with over 2 billion deposit records, in nearly 5,000 branches, covering 48 states), 85% of all client MMDA balances are in accounts over $100K. Therefore, legacy tier structures (e.g., highest tier at $100K) risk losing pricing power, as top tiers have the highest betas. Do your homework on balance tier allocation and decide when it’s time to re-tier or structure a new product with differentiating features.
2) Tell your deposit surge story.
Deposits360° users experienced a 65% increase in business account average balances, and a nearly 40% increase in consumer average balances. Since the end of 2019 alone, non-maturity deposit balances have increased more than 50%. Clearly, this surge reflects agita around balance stability as the Fed continues to tighten. But confident deposit planning will come from the data. Analyze the following:
Dive into large balance concentration trends. Much of the deposit surge occurred from existing customers with total relationship balances over $250K. Consider focusing on the largest average balance increases over the past two years and devising a plan. A long-time Deposits360° client noticed their largest average balance swings occurred in small- to mid-size business accounts. Their goal was to make a phone call to each of them to solidify their relationship and learn more about the business’ plans. Be equipped with the data.
Break down post-COVID growth by business, consumer, and public funds. Banks active in PPP lending may still have much higher DDA balances, while more consumer-driven institutions may have seen their surge spread throughout their demographic base. A clear picture of where growth came from reveals where “at-risk” deposits are on the balance sheet, which can support a plan to manage / pay for liquidity as rates rise.
Quantify CD balances that shifted into non-maturing products. Deposits360°® analytics show that half of all CD post-pandemic outflows are sitting idle in non-maturity products. These depositors will surely be the first to move when CD specials enter the marketplace. You may want to be equipped with a shelf product or strategize to extend deposits at below-market rates before competition intensifies.
3) Identify at-risk depositors.
The challenge with identifying at-risk or rate-sensitive depositors is that most accounts are still paid a low-rate today (excluding public funds). Consider pulling a watch list of the following characteristics to develop individual or product pricing plans:
Single-source CD relationships. Deposits360°® data suggests that single-source CD customers are three times more likely to leave an institution upon maturity than multi-relationship customers.
High-rate depositors. Look back to when rates peaked in 2018 to find out who the rate-sensitive customers were. How many of these high-rate customers were also single account relationships?
Large balance concentrations. Much of the deposit surge occurred from existing customers with total relationship balances over $250K. Institutions are wise to focus on accounts with the largest average balance increases over the past two years, and develop specific outreach and retention strategies.
4) Heed lessons learned from prior cycles.
Were your deposit specials introduced with no barriers to entry? Was there a new money component? How did shorter-term vs. longer-term CDs perform during different stages of the cycle (i.e., new money gained)?
Inform ALCO and the pricing committee of the successes – and learn critical lessons from any high cannibalization specials. In late 2018 and through the first half of 2019, it was common to see cannibalization levels well over 50% on CD specials in DCG’s Deposits360° dataset. This can increase the marginal cost of funds on CD specials by two to three times the stated rate.
Although barriers to entry may carry negative connotations, we see many successful deposit campaigns that creatively incorporate new money components, relationship-based products, and premium MMDA rollouts with different structures than legacy products.
5) Track behavior patterns / monitor attrition.
Many depositors likely have not banked through a tightening cycle like the current one. Rates are moving fast, and nimble pricing decisions are critical. Tracking deposit flows can help institutions gauge whether pricing levels are creating incentives for depositors to leave. Excess liquidity has prompted many bankers to stretch their lag capacity on deposit rate increases, and balance stability is already starting to react.
Do you have early warning systems for attrition monitoring in place? Are you actively reviewing your depositors with the largest balance declines each period? Are you analyzing depositors with consecutive balance reductions over time? In the past cycles, many bankers produce positive results by implementing simple attrition management tactics.
For more information
Let’s face it, trusting “gut” generally guides us in the right direction in many aspects of life. But when it comes to banking, combining instinct with data analytics brings the necessary clarity and confidence to make the right deposit decisions – especially during a historic tightening cycle. Your margin may depend on it.
Darling Consulting Group is an independent strategic partner to over 600 institutions throughout the country. DCG’s Deposits360°® online deposit solution helps institutions bring clarity to deposit behavior patterns (e.g., cannibalization and attrition) to support decision making.
Learn more about our Deposits360°® services.
ABOUT THE AUTHOR
Joe Kennerson is a Managing Director at Darling Consulting Group. In this capacity, he works directly with financial institutions by providing solutions for their asset liability management process in the areas of interest rate risk, liquidity risk management, ALM modeling, regulatory compliance and executive-level education. He is a frequent speaker and author and directly advises clients in all aspects of ALM.
Contact Joe Kennerson: jkennerson@darlingconsulting.com or call at 978-499-8150 to learn more about our Deposits360°® services.
© 2022 Darling Consulting Group, Inc.
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