As recently as April 2022, more than half of all commercial deposits were in non-interest-bearing or analyzed accounts with low ECRs. Today they’re down to just over a third of all balances (see chart, left side). That’s cut deeply into net interest margins and profitability. Now, with interest rates expected to fall, banks could be on the verge of some relief, but they need to know where to find it.
Fully 63% of balances are in what Curinos calls the “opportunity zone.” These are larger balance accounts that are being charged bank-managed or negotiated interest rates that may absorb more aggressive rate decreases without triggering outflows (see chart, right side).
So how best to capitalize? Here are four areas to focus on:
- Assess your starting point. What are your funding costs and projections? What portion of your rates are indexed or adjust by balance tiers? Are you outperforming or underperforming your competitors? These factors will inform either an aggressive or moderate strategy.
- Understand your portfolio mix. Which balances can withstand more aggressive cuts? Where is there client-concentration risk or high levels of rate sensitivity? Your mix guides where to pick your spots to down-price without risking balance attrition.
- Be sensitive to individual client relationships. Protect key relationships, to be sure, but use this opportunity to improve profitability where pricing has not taken into account the entire relationship. Truly high-value relationships don’t necessarily receive the steepest discounts.
- Prepare to adjust. Monitoring portfolio rates, balance inflows and outflows, and competitor behavior will be key to maximizing the positive financial impact of a falling rate environment.
Falling rates will bring opportunity. Now’s the time to plan for it.
In a falling rate environment, almost two-thirds of commercial balances fall into the Opportunity Zone for rate treatment.
(Click image to enlarge)
Portfolio Makeup Over Time
All Banks
Balance-Tier Makeup Over Time
All Banks
