From “How Essential Analytics Can Drive Effective Deposit Strategy”, a Curinos webinar presented in conjunction with the Consumer Bankers Association (CBA). The webinar featured Adam Stockton, head of retail deposits and lending; Agusta Patton, director of Client Solutions; Ravi Subbaraya, director of consumer deposits; and Brad Resnick, director.
For banks and credit unions trying to manage deposit flows, two things are clear: Deposit betas won’t fall as fast as market interest rates, and the near-zero-rate environment of the past several years is unlikely to return any time soon. Among other implications, this means CDs are here to stay, and how to deal with maturities will be among the most consequential of this year’s priorities.
Rates rapidly rising to 17-year highs have tested institutional memories, and so will the declining rate cycle to come. In this unfamiliar milieu, data-fueled analytics will be essential for FIs to maximize retention and minimize cost. Here are some thoughts on why:
1. A RETURN TO GROWTH, SORT OF
Curinos projects that consumer deposit portfolios will grow in 2024, but only modestly – 0% to 3%, compared with the historic norm of 4% to 7%. That growth stands to be distributed unevenly: Direct banks, which comprise 20% of the total, could increase at a double-digit rate, while the typical traditional bank will be flat or even shrink slightly. As with all projections, these are subject to a variety of factors. Among them are a modest change to inflation or wage growth when the Fed ends quantitative tightening and the potential of stricter regulations that affect a bank’s’ liquidity and deposit mix.
2024 Deposit Outlook
2. CDs ARE STILL THE STORY
Strong CD growth last year means high maturity volume in 2024, especially in the early months. Through July, the maturing volume is fairly evenly split between short-term CDs issued at high rates and longer-term CDs (11– to 24–month) issued at much lower rates. Given expectations for Fed cuts later in the year, how long to lock in early 2024 renewals could pose a challenge for banks. Many renewing customers will want longer duration CDs at the prevailing higher rates, while banks will favor shorter-duration lockups, though not so short that they threaten liquid balances.
Average CD Maturing Balances By Term | Branch Banks | Jan ‘24 – Dec ‘24
3. ANALYTICS ARE ESSENTIAL IN GAUGING MATURITIES
Managing upcoming maturities requires a line of sight into how renewing behavior – attrition, switch and auto–roll – is affected by how the maturity rate compares to what’s being offered in the market. The institution in this illustrative example faces high maturities in January because its rates are right up against the top of the market. Essential analytics can help better prepare for expected attrition and switch – whether the institution can hold on to those deposits and, if so, whether it matures at the current rate or ends up in a different bucket altogether.
Maturing CD Essential View: Illustrative Example
4. ANALYZE MATURITIES AT THE CUSTOMER LEVEL
Whether a CD auto-renews or switches at maturity is as much about customer behavior as rate, maybe more, and assessing that behavior requires analytics-enabled term scoring. For those accounts that are likely to auto-renew, no action is needed. Those not likely to auto-renew (lower-right of chart) are going to be shopping and are likely to respond to a term-switch CD offer. For those not likely to auto-renew and not likely to stay in a CD (upper-right of chart), there’s no percentage in raising CD rates, but offering a targeted savings rate might retain them.
Term-Score-Based Renewal: Behavior And Treatment
5. FLOW–OF–FUNDS ANALYTICS GET TO THE ROOT CAUSE
A critical element in navigating a changing rate environment is understanding a deposit portfolio’s flow of funds. This example illustrates the decrease in checking balances in a falling-rate environment. As balances fall, it may look as if customers are abandoning ship. But a flow–of–funds analysis finds that most of the runoff was from what Curinos calls the “change to existing,” which may have included delayed purchases from the pandemic-induced deposit surge. The balances drew down but the accounts remained open. Attrition, as represented by the smallest bucket in the chart, represented a relatively small portion of outflows.
Flow Of Funds
