Deposit Performance

Financial institutions can gain important insights into their deposit performance using Curinos’ Comparative Deposit Analytics (CDA). Banks can use CDA to track asset/liability management tactics, compare deposit rates, and improve pricing techniques.

By using CDA’s advanced analytics to better understand the supply and demand for deposits, financial institutions can better optimise their pricing strategy for maximum returns.

Where U.S. Deposit Levels May Be Headed

U.S. bank deposits are in decline, down 2.4% since peaking in April 2022. That doesn’t sound like a lot, but those declines are unprecedented. And they translate to $440 billion in deposit outflows from banks. What you need to know:

  • 90% of the surge, or $3.4 billion of balances, is sitting on bank balance sheets
  • Given the current balance of monetary tightening and growth, these balances are set to decline by between $50 billion and $100 billion per month with some seasonal variance
  • This will be felt acutely by banks with a higher level of reliance on commercial deposits and large-dollar retail savings accounts

Loan-to-Deposit Ratios Well Below Historical Averages

Banks continue to sit on significant excess liquidity, with loan-to-deposit ratios well below historical averages. But with deposits draining from the market, there is an increasing sense of urgency from banks to understand where deposit levels go from here.

Some banks, moreover, already face significantly more acute funding pressures. Why?

  • The 2.4% aggregate decline in balances is unevenly distributed across deposit pools
  • Consumer balances are down only modestly, while commercial deposits are down an average of 8% year over year
  • Small business and wealth deposit performance are situated between the two, though somewhat closer to retail
  • The mix of customers and funding that a bank has across those segments is having a large impact on bank performance

Portfolio Agility And Changing Market Conditions

As of today, there is little visibility into what 2023 will bring and there are multiple (and dramatic) scenarios that could occur. In all cases, banks will need to focus on fundamental portfolio quality and agility as market conditions change.

Laying Out The Scenarios

Declines in bank deposits are often a precursor to recession. In short, companies begin to run out of money, then borrow to keep the ship afloat. Eventually, softening demand collides with higher borrowing costs. It’s possible that we are beginning to see that dynamic play out, but the key determinant will be the balance of quantitative tightening and economic growth. And the range of potential scenarios to plan for is exceptionally wide. We offer three to consider:

It’s critical to comprehend how the spike in commercial deposits will impact deposit performance when it subsides. Given present market conditions and the state of the economy, it is likely that U.S. deposit levels will remain stable or even modestly fall in the short term.

Financial institutions must be aware of how well their present deposits are performing and be ready for any potential adjustments in the upcoming months. Businesses may make wise decisions and maintain their ongoing success by having a solid understanding of how deposits are doing in the current market climate.

Deposit Performance: How To Prepare For The Unknown

What does this all mean for banks? Given the range of potential scenarios and the unreliability of most macro-economic crystal balls, the keys to success are fundamental portfolio quality and agility in the market.

Fundamental portfolio quality means having a diversified book of primary relationships across consumer and business segments. This requires long-term strategy and execution. Environments such as the one we’re in underscore the value of such a strategy. But unfortunately, you can’t dial one up on a dime.

Fortunately, agility is a faster-acting medicine. The key components of agility are portfolio analytics to understand the drivers of portfolio performance in near real time. They include:

The stakes will be high. Banks that run low on funding without a plan are punished in the market if they are forced to pay premium rates for low-quality deposits. It’s much more efficient to build the infrastructure that pivots on the front end of a change in market conditions than having to play catch-up on the back end.

Retail focus: Changes Continue To Accelerate

Within the consumer business, deposit runoff continued during the fourth quarter of 2022. Aside from a seasonally typical pause driven by normal holiday and bonus-related inflows, runoff was present in both checking and savings/MMDA, although overall deposit runoff improved slightly from the third quarter. Consumer deposits at branch banks declined 1.3% in the fourth quarter compared with 2.5% in the third quarter; strong CD growth accounted for much of the turnaround.

This turnaround has come at a cost, with betas increasing from floor levels. Average portfolio rates for savings/MMDA now exceed 0.50%, with the average bank in Curinos’ Comparative Deposit Analytics observing a total consumer portfolio beta of 10%. Interest expense increased 0.43% through the first 4.25% Fed increases.

As noted above, Curinos expects continued beta pressure even in the event of a Fed plateau. In the three months following the last Fed increase in 2019, 4% of savings balances and 6% of CD balances switched to higher rates, driving portfolio interest expense an additional 0.15% higher after the final Fed increase. (See Figure 1.)

Figure 1: Consumer Portfolio Interest Expense Changes During Last Fed Plateau (Dec. 2018 - June 2019

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All Consumer Deposits

Source: Curinos Comparitive Deposit Analytics (CDA)

With the gap between back book and front book rates significantly wider in this cycle compared with the last, the same level of churn could have even greater effects. Additionally, the potential for an extended plateau leads to ongoing risk of interest expense creep. Bankers must be on the lookout for this and create plans to manage it.

Commercial Focus: Competition Heats Up

Commercial banks are entering 2023 following double-digit loan growth on a year-over-year basis in 2022 and a 11.7% year-over-year decline in deposits. Sentiment shifted decisively in 2022 to focus on growth and retention instead of lagging the Fed’s rate hikes. In response, betas accelerated through the second half of the year. But that wasn’t enough to stanch the balance outflows as quantitative tightening drained liquidity from the market. Commercial customers stepped in to buy bonds, filling the funding need created as the Fed reduced its balance sheet. In turn, commercial deposits drained from balance sheets.

Looking at what’s in store for 2023, commercial banking businesses face three distinct challenges:

  1. Continued back-book repricing of interest-bearing deposits, even as the Fed funds rate plateaus. While average commercial MMDA betas are now at 48% through the cycle, roughly 25% of balances are still priced below 50 bp. There is significant room for betas to increase further if a portion of these balances move toward market average (or higher) rates. (See Figure 2.)
  2. Rotation of balances from non-interest bearing to interest bearing accounts. Average ECR balances were down 9% in the fourth quarter, while interest checking balances were up 3.9% and MMDA balances were flat. While an increase in realized net fee income can cushion some of the earnings impact from this rotation, it can be quickly overwhelmed by the added interest expense on larger balances.
  3. Ongoing headwinds to growth as the Fed maintain the pace of quantitative tightening. While there is a wide range of possible balance growth scenarios under various macroeconomic conditions, the most likely scenarios point to another year of negative commercial deposit growth.
Worst-Case Scenario – Stagflation: Inflation persists due to energy turmoil and supply chain woes, but the continued impact of higher rates drives the economy into a deep recession. Stuck between an incredibly difficult choice of breaking the back of inflation versus alleviating economic pain on businesses and individuals, the Fed forges ahead with quantitative tightening. In this scenario we would expect a severe drop in deposit balances. Moderate Scenario – Soft-ish (or better) landing: This scenario would see a gradual easing of inflationary pressures without a major recession. Curinos would expect very modest declines in total balances to persist as the Fed continues to drain liquidity through quantitative tightening. These outflows would be at least partially offset by increase in leverage as growth returns. Best-Case Scenario – Light at the end of the tunnel: Geopolitical tensions ease. Energy markets normalize. Businesses and individuals continue to resume pre-pandemic behaviors while major urban real estate markets adapt to shifting patterns of work, living and recreation. In this scenario, robust growth would support modest increases in total deposits, similar with what the market experienced between 2017 and 2019.
Source: Curinos CDA

Optimizing commercial deposit portfolio performance in this environment will require agility in responding to enterprise funding needs and a comprehensive approach to relationship pricing. The combination will help balance shifting economics across loan and deposit spreads and fee income.

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