The FOMC held the Federal Funds target range flat at 5.25% to 5.5%. However, the FOMC statement emphasizes attentiveness to both sides of the dual mandate, and Chair Powell’s comments in the press conference suggest that, with continued progress on inflation, a rate cut will likely be on the table in September. This will be welcome news for banks that have been waiting for relief on rising funding costs and exposures to rate-sensitive asset classes.
But relief will not come instantaneously or automatically. While the acquisition costs for interest-bearing deposits will continue to come down, it will take more time and effort to bring down portfolio costs. Why? Because many price-sensitive consumer CDs are maturing at rates well below current offers in the market, and back books continue to gradually churn. In addition, some higher-priced balances will take time to bring down either because of product term or because customers have only recently been brought up to market rates (Figure 1). Moreover, in the heavily exception-priced commercial and wealth segments, bringing down rates often requires customer-level decisioning by pricing teams and bankers/advisors.
Figure 1: Consumer / Commercial Betas in the 3 months after the first rate cut in 2019
Consumer Portfolio
3-Month Betas | Oct ‘19
Commercial Portfolio
3-Month Betas | Oct ‘19
Source(s): Curinos Analyzer
Note(s): 3-month betas are calculated based on July 2019 as the start date
Winning in the early stages of a rising rate cycle requires the discipline to not act. Winning in the early stages of a falling rate cycle requires preparation to act – and the time to prepare is now. In the consumer space, this means developing strategies to bring down portfolio costs on CDs and liquid savings – especially through auto-renewal optimization. In commercial and wealth, this means proactively identifying clients whose relationship profitability and behavioral characteristics indicate a faster pace of down-pricing when the Fed makes its moves. And it requires the operational and organizational preparation to execute on those plans.
On the asset side of the balance sheet, despite some recent improvements in volumes, one or even two 25 bp rate cuts will likely not be sufficient to unlock volumes in the housing market (Figure 2). As such, the paradigm for real-estate lending remains tactical management in a challenging environment. To take share in a constrained overall market, banks are increasingly looking to refine pricing strategies ranging from geographic pricing in the conforming market to relationship pricing in the jumbo market. Home Equity lenders will receive a jolt of confidence as rates begin their descent over the next few quarters. Types of loans for debt consolidation will be at the forefront of lenders’ success amid higher-interest, debt-strapped borrowers, making home equity products a prime opportunity for balance sheet growth.
Figure 2: The effect of Fed Funds rate cuts in 2019 immediately affected variable-rate products, but fixed-rate products remained mostly unchanged in the months that followed.
Real Estate Secured Average Rate Trends
Finally, with all the focus on down-pricing, banks also must remain focused on driving primary customer acquisition. Effective acquisition strategies, fueled by the combination of pricing, marketing and network management, provide a base of stable, low-cost deposits and fuel future revenue and profitability growth.
