From “Creating A Winning Deposit Strategy in 2024”, a Curinos webinar presented in conjunction with the Consumer Bankers Association (CBA). The webinar featured Adam Stockton, head of retail deposits and lending.
Deposit growth is possible in 2024, but not without paying for it. In our view, this will be the case for all deposits across all lines of business. We see CD renewals accelerating starting in the final months of 2023 and continuing into next year, which will put additional pressure on interest expense and balance retention.
The Federal Reserve has been clear that the inflation rate will determine the Fed Funds target rate. Our historical analysis and modeling indicates that inflation is also the leading predictor of consumer deposit growth. With inflation down several percentage points year on year, there’s some reason for optimism as we look at 2024.
But that optimism should be tempered. In 2019, the last time the Fed Funds rate plateaued, total portfolio interest expense for banking institutions climbed an additional 15 basis points over the subsequent six months. Key reasons for this include competitive rate movements, CD churn and rotation from the back book to the front book.
How to think about creating a winning deposit strategy in 2024:
ANALYTICS AND OPTIMIZATION DRIVE PROFITS: A deposit strategy built on a hunch is bound to fail. We’ve seen significant deposit cost savings for banks and credit unions with robust analytics in place, whether their primary objective is to grow deposits or improve margins (Figure 1). And for those that also pursue price optimization, our numbers indicate that there’s another 14 basis points’ worth of benefit.
Figure 1: Having Analytics And Optimization Drive Better Results, Regardless Of Strategy And Interest Rate Environment
Notes: Includes all traditional brick and mortar banks above $10B in assets, excluding money center banks; price optimization users use the module more than 10% of total business days between August 2022 and August 2023
MARKET DENSITY MATTERS FOR STRATEGY: In a “dense” market, where an institution is well known and has a strong branch presence, the efficient deposit play may be core customer acquisition (Figure 2). This is because brand strength can help bring in lower–cost relationship balances. But to build share in “thinner” markets, where the brand is less familiar, banks may have to rely on rate to attract new accounts.
Figure 2: In addition, market-specific dynamics must be taken into account – what works in one market may not be the best approach in another
Portfolio Makeup Over Time (Interest)
Source: Curinos Analysis
BALANCING RATE AND NON-RATE MARKETING: If you offer the best rate and don’t tell anybody, the only people who will know are existing customers. Getting the word out is the role of marketing, which can be impactful on the non-rate-focused side (Figure 3). Regarding branch consolidation, institutions should be selective about closures to make sure they’re not losing access to low-cost deposits. Longer term, other differentiators and value propositions are available.
Figure 3: While rate remains a strong differentiating factor, a deposit strategy must also align non-rate tactics, and trade off short-term vs. longer-term growth
Source: Curinos Analysis
THE FIRST CD RENEWAL IS KEY: The last time 5% CDs matured, back in 2006-08, there were huge differences between banks across key retention metrics. Total balance retention varied by as much as 15%, and auto-renewal rates by up to 50%. And there was an 80+ bp difference in interest expense based on the chosen strategy (Figure 4). A big part of a CD strategy is getting that first renewal – do that and you’re much more likely to get subsequent renewals.
Figure 4: Deposit tactics drive further efficiency beyond setting the right strategy – as an example, CD performance varies widely
TARGETING AT THE INDIVIDUAL LEVEL: When considering CD terms, substitute products and rates as inputs for keeping a customer, the most forward-looking financial institutions are getting down to the individual level (Figure 5). If a bank knows that a first–time CD customer is much less likely to renew, what can it do to improve the odds? Focusing at the specific customer level can result in less use of on-sale offers to acquire deposits.