With two FOMC rate cuts now behind us, Curinos Commercial Deposit Analyzer data show that commercial banks have deployed more aggressive strategies in passing betas through than in the prior falling rate cycle beginning in 2019. This is no surprise given the high cost of commercial deposits that resulted from the rapid and steep prior upcycle. Banks are now ready to counteract the effects of increased rotation into interest-bearing products and the back book repricing that was required to retain deposits.
To maximize interest expense savings from rate cuts while minimizing attrition, each commercial bank needs to develop a disciplined, comprehensive strategy. Understanding where your bank was positioned in the market heading into the falling rate cycle is essential.
Specifically for MMDA portfolios, Curinos recommends the following approaches aligned to year-to-date deposit growth performance and portfolio rate position entering the cycle:
A. Low Growth / Low Rate: Play Defense
- Banks in this position have betas at 106% and continue to lose balances, which may lead to further attrition.
- Sustainability is key. Monitor risk of attrition with key clients or underpriced products, and adjust to meet or exceed market rates to retain deposits.
B. Low Growth / High Rate: Be Precise
- With growth of 1.1%, and betas at 79%, interest expense needs to come down more quickly, unless preservation of balance growth is the higher priority.
- Monitor market pricing and balance flows, reserving high rates for clients interested in full relationships.
C. High Growth / Low Rate: Grab Market Share
- These banks started off in a strong position but have lost 3.3% of balances since the beginning of the falling rate cycle despite passing through the lowest beta: 73%.
- Discipline on the way up means you can afford to be bold. Move assertively to win the most desirable relationships from competitors, while monitoring low-priced clients for signals of price shopping.
D. High Growth / High Rate: Be Aggressive
- Progress has been made by this group toward reducing interest expense with betas at 82% and growth of 1.8%, but they may be able to reduce interest expense even further.
- If enterprise funding permits, consider sacrificing balance outflows to bring MMDA portfolio rates down; monitor client flows and market rates diligently.
Regardless of what actions the FOMC takes next week, or even in the coming years, knowing your starting point, staying informed of market trends by following the data and adapting your pricing strategy quickly will ensure the best possible outcome for your financial performance.
In setting their best deposit strategy for the falling rate cycle, commercial
banks need to understand where they started in the first place.
Source: Curinos Commercial Analyzer
