- A recent Curinos survey of commercial bankers revealed that two-thirds of them expect their institution’s commercial business to grow at a faster pace than the rest of the industry. We applaud the optimism, and we share it. But because not every institution can outpace the competition, there will be winners and losers. The central question for banks becomes where to focus and how to execute a growth strategy that positions them to gain outsized market share.
Balancing Optimism with Reality
After several years of challenges, the commercial sector is poised for growth, thanks to what appears to be an increasingly favorable economic and regulatory environment. But let’s be clear-eyed: many of the challenges persist. The growth of private credit has been relentless—tripling from only 7% of the commercial and industrial (C&I) lending market in 2010 to more than 20% today. It’s disrupted conventional lending models and has called for a new playbook that borrows from some of its pages, such as partnerships with non-bank entities.
Meantime, thanks to stubbornly elevated interest rates, non-interest-bearing (NIB) commercial balances have fallen from 50% of all balances to less than 30% in less than three years. Even if market rates soften, the days of near-zero deposits and healthy earnings credit rate (ECR) balances are behind us. Higher funding costs are likely here to stay (Figure 1).
As a result, many banks will need to fundamentally rethink where and how they’re going to find growth, and in our view the best place to start is with a rigorous focus on retooling portfolios and on balance sheet and credit mix.
Figure 1:
Repositioning the Business
By focusing on new business mix, repositioning the business can manifest in three essential ways:
Adjusting segments. This requires understanding what winning looks like in promising segments and where a bank has differentiated its product capabilities and expertise to do so. We find that leading banks are revisiting the chalk lines around Small Business, Business Banking, Commercial and Corporate & Institutional in order to drive toward more efficient and focused go-to-market strategies in segments where they believe their right to win is far greater than that of their competition.
Expanding in key markets and verticals. Key to success here, and thwarting incursion from private credit, is for a bank to know how to differentiate its expertise and how to manage the risk inherent in any segment or vertical. Being able to address the complex cash conversion cycle unique to specialty industries requires offering the right treasury management and payments products and providing strategic advice from its relationship managers and treasury management sales teams.
Concentrating on core commercial relationships. Especially with the pullback from commercial real estate, C&I lending has become a key focus for many banks that are eager to strengthen their share of low-cost operating deposits and to gain access to the valuable fee revenue that comes from becoming the primary bank for a core commercial business.
What’s key in any repositioning is that banks need to be sure they’re not just rearranging the deck chairs. They need to be committed to truly responding to a go-to-market or servicing challenge in areas that warrant additional investment. Focusing on total relationship value and aligning to clients’ key priorities and pain points will earn them the right to win more of these valuable relationships.
The Impact of the Core Commercial Relationship on Deposits
The ability to gather deposits from the lending relationship—what Curinos calls the deposit generation ratio (DGR)—varies widely by institution, and the impact can be significant. For every $1 billion of loans outstanding, the difference in deposit generation between banks in the bottom quartile and median performance can be as much as $110 million (Figure 2, left side).
Success in securing that all-important operating cash can be tied most closely to three factors. First, the value of primacy can’t be overstated. This includes relationship pricing when securing loans to make sure the operating relationship remains secure, and that in turn requires establishing and maintaining connectivity between the client, the banker and treasury management. It also requires having the data to understand current pricing compared to industry benchmarks, no matter what the rate environment, so an institution can adjust its portfolio costs quickly as needed and acquire new deposits at a market-competitive rate. This can make a difference of 10%-15% in the volume of deposits between highest performance (mostly national banks) and lowest (Figure 2, right side).
Figure 2:
Source: Curinos analysis, Commercial Analyzer Executive Summary
Second is the incentive structure for relationship managers so they can secure the quality deposits in the first place. Getting this critical piece of the equation right can yield as much as 10% more in deposit gathering.
Third is product. Hybrid accounts, ledgering and virtual account capabilities and rapid emergence of insured cash sweeps have all created pockets of differentiation in liquidity solutions. Furthermore, the time value of money will remain a priority while we have a higher-for-longer rate environment, further shifting the focus of the value equation onto liquidity products.
The Impact of the Core Commercial Relationship on Fees
The lending relationship can also have a meaningfully positive effect on the generation of treasury management fees, as illustrated by the credit leverage ratio (CLR). Here, deft execution can add as much $800k in fees for every $1 billion of loan volume (Figure 3, left side).
Again, success starts with winning the right relationships, those that have sufficient volume and activity, then exercising discipline in cross-selling newly introduced products and services to existing clients. In many cases, that means with determining whether those longstanding relationships truly consider the institution their core operating bank—meaning their core provider of banking technology solutions—and reframing in their minds the value they expect to receive from their lender.
Delivering products of value is once again key to success. Rapid innovation in treasury management and payments solutions continues, especially integrating with adjacent technologies and new, faster payment rails. As the product set and competitive landscape evolve, pricing them correctly is essential—aggressive enough to receive fair value for services rendered but not to the point that clients are tempted to shop the relationship. Balancing the value of the commercial relationship with the bank’s overall profitability thresholds generates meaningful additional value for both the bank and the client (Figure 3, right side).
Figure 3:
Source: Commercial Analyzer Executive Summary
Commercial Deposits Can Be an Efficient Source of Funding
Among some CFOs and treasurers, commercial deposits have the reputation, often undeserved, of being expensive. But so far in the falling phase of the rate cycle, they’ve passed through nearly as much beta as Wealth deposits and considerably more than both Consumer and Small Business. In addition, their portfolio rates are significantly less than those of both Wealth and direct banks. Even for acquiring new money on a marginal basis, commercial deposits are competitive (Figure 4). Deposits are the fuel that enable lending assets to grow, so discipline around winning core operating relationships and pricing those relationships effectively is a requirement to growing more quickly, and more profitably, than a bank’s peers.
Figure 4: Falling Rate Deposit Beta | Current Cycle1
Source(s): Curinos Deposit Analyzer
Note(s): 1) Current cycle defined as Aug – Dec ’24 (100-bp cut)
Commercial banks are optimistic about the coming year and that sentiment for growth has been baked into their rebounding stock prices. But the growth needs the raw material to fund it, and a more strategic mix of new commercial relationships can be a pivotal source. Capitalizing on the opportunity will require cementing high-value primary relationships. It will also require the data-fueled analytics to make decisions around pricing and deposit gathering. And to meet the moment, the question overarching all of these considerations needs to be: Are we going to materially change the way we go to market?
