From “Greater Profitability in 2025 and Beyond: Ingredients for Success,” a Curinos webinar on August 22, 2024, presented in conjunction with Consumer Bankers Association and featuring Curinos executive vice president Pete Gilchrist and Curinos senior vice president Olivia Lui.
Challenges
1. Compressed margins and slower non-interest revenue growth have led to suppressed returns.
Virtually all industry indicators continue to display challenges for the banking industry in 2024. Profitability and return on common total equity are down, as are price-earnings multiples on stock prices. Much of it can be tied to the continuing gap between deposit costs and loan yields. Concerns for the balance of the year include CRE and CI asset quality as well as ongoing compression to net interest margins. But with rates set to decline, there are bright spots. Revenue growth could accelerate as could operating leverage thanks to investments in IT and AI, all against a backdrop of greater macroeconomic clarity.
2. A shifting rate cycle doesn’t mean that funding cost relief will be easy or automatic.
Perhaps the biggest challenge in the early going of a falling rate environment is the disconnect between the expectations of bank investors and reality. At the beginning of both a rising-rate and declining-rate cycle, 100% betas are not immediate – deposit pricing lags actions by the Fed. Today, CDs are much more part of the mix than they have been in the past and they’re expensive in the early innings of rate declines. And on the commercial side, non-interest-bearing balances represent fully 30% of total balances, and they continue to rotate into interest-bearing.
Prior Falling Rate Cycle Beta – First 3 Months
Beta Headwinds in Falling Rate Cycle
Source(s): Curinos Optimizer, SNL Data, Curinos Analyzer
Note(s): *CD Renewal profile is tagged at customer level, such that first-renewal CDs originate from CD customers reaching maturity for the first-time. Simple averages displayed. Online banks excluded; 3-month betas are calculated based on July 2019 as the start date
3. Lending remains subdued in most segments, driving down spreads.
With declining rates on the horizon, green shoots are appearing, but improvement to the home-lending market will be gradual as will any growth to commercial-real estate and commercial lending. Amid economic uncertainty, the cost to borrow remains elevated and consumer credit quality is declining. Contributing to the sluggishness will be not only the nature of macroeconomic cycles but also encroaching competition from non-banks. Because rapid growth through balance sheet is more difficult in this environment, any revenue will need to be garnered from optimization.
Consumer vs. Commercial Loan Growth
YoY Loan Growth by Bank Segment
Market Outlook and Complications
Sources(s): SNL, Curinos Analysis
4. Decline in industry-wide OD / NSF fees means banks will need to fill the gap with revenue from other sources.
Even though other streams of noninterest revenue are seeing some growth, the amount of decline from consumer overdraft and non-sufficient funds is quite drastic, which will require shoring up revenue from other sources. These could include pursuing other segments besides the mass market, which is becoming increasingly unsustainable without being subsidized by, say, mass affluent or wealth. The decline in consumer non-interest income is putting a further drag on the speed to which profitability can recover.
Non-Interest Revenue Drivers | 2019 – 2023 CAGR & 2022 – 2023 YoY
Source(s): SNL, Curinos Analysis
5. Banks continue to struggle to understand and respond to shifts in customer preferences and behaviors.
When it comes to opening accounts, consumer preference for digital continues to grow unabated and now stands at seven in 10 accounts. At the same time, cracking the code on the quality of digitally originated balances remains elusive. After six months, accounts generated in branches are still 2.5x higher than those originated through digital means and they attrite much more slowly. On the commercial side, the migration from non-interest-bearing to interest-bearing accounts continues to accelerate, from more than half non-interest-bearing in March 2022 to less than a third today, and it’s putting its own strain on overall portfolio costs.
Consumer Preferences Are Shifting Toward Digital
Commercial Clients Are Getting Smarter On Optimizing Cash Yield
Source(s): Curinos Analysis, CML Analyzer, 2023 US Shopper Survey
Responses
- Manage funding with fierce precision.
Get a better understanding of pricing and value differentiation between deposit pools and how to optimize around them. As part of that imperative, deploy a granular segment-based pricing strategy that is informed by near-real time, data-founded intelligence on market rates. Where warranted by segment – wealth, for example – and specific accounts within those segments, manage exception pricing with discipline and align it closely to customer value and profitability.
- Prioritize primary customer growth.
Primacy, especially through early funding, continues to be the key to retail profitability, and the right analytics to sell the first product have made that easier Then the relationship needs to be deepened through differentiated products and personalized precision. Winning primary relationships on the commercial side requires a laser focus on cross-sell and targeted acquisition.
- Right size the investment levers.
Optimize the branch network and engagement model to drive more effective growth, keeping in mind that accounts opened face to face have larger balances and last longer. Sharpen the pencil on marketing and apply the precision to segments and geography. And automate backend processes through technology and AI. The industry is learning where AI can best be applied, and that’s where the investment dollars need to go.
- Catalyze non-interest revenue growth.
Value exchange across segments needs to be reimagined, and fees need to be structured accordingly. In an environment of declining retail fee revenue, monetizing investments in treasury management will be essential, through disciplined pricing increases and more effective cross-sell to improve penetration.
- Develop meaningful digital experiences.
Improve the quality of digitally originated relationships through optimizing the onboarding experience. With incidents of fraud mitigating – much improved in recent years – think about how the best of the personalized experience can be replicated through digital. Be early with direct-deposit sign-ups, and put the debit card in the customer’s hands as soon as possible. And continue strategic investments in digital capability for business clients to compete effectively with the maturing set of fintech alternatives.
