- Portfolio rates have increased 54 bp since the Fed stopped raising rates in July ’23, as remixing continues because of higher-rate CDs, back book repricing and the ongoing higher expectations of consumers.
- If rate cuts don’t materialize until mid-2025 or later, competition for high-rate deposits and churn will likely continue, resulting in ongoing elevated portfolio rates.
- To get through the next six to 12 months, FIs have three key near-term levers to pull: data-driven scenario planning, a CD-retention playbook, and assessment of primary banking relationships.
As recent as early 2024, the idea that rate cuts would be postponed until 2025 would have been a banking CFO’s worst nightmare. Competition for rate-based deposits was fierce amid top-of-market acquisition rates well north of 5% – but at least relief was in sight. The Fed had signaled no more rate increases followed by rate cuts, and most banks had three to six reductions baked into their plans. But inflation remained stubborn as the low-unemployment economy stayed resilient, and the prospect of rate cuts this year dissipated quickly.
Historically, the direction of interest rates on deposits has lagged Fed rate actions, and this past year has been no exception. Portfolio rates have increased 54 bp since the Fed stopped raising rates in July ’23, as remixing continues because of higher-rate CDs, back book repricing and the ongoing higher expectations of consumers (Figure 1).
Figure 1: Increase in Deposit Costs
Delays in rate cuts will likely mean increasing portfolio rates.
That’s according to Curinos’ Retail Deposit Analyzer, which allows our clients to maximize portfolio performance with actionable deposit intelligence. Q1 earnings announcements from almost all banks continued to headline net interest margin (NIM) compression. Yet, some seemed to be putting hope ahead of data in developing benign forecasts for the balance of 2024. Q2 projections for rates ranged from an optimistic two cuts starting in September and three more in 2025 to just one in December and three in 2025 (Figure 2).
Figure 2: Range of Fed Outcomes | Fed and Market Forecasts
Markets had Fed rates dropping 3x between Sep – Dec 2024
but changed to only one after the June 12 FOMC.
But what if these estimates have to be revised again in Q3, and there are no rate cuts in 2024 and none until late 2025? What might that mean for deposits?
With rates higher for longer, deposits are continuing to stay in CDs with some flowing into high-rate liquid deposits at banks using savings promotions to manage duration. No rate cuts until mid-2025 or later will likely lead to continued competition for high-rate deposits and churn, resulting in continued elevated portfolio rates. Higher inflation with economic weakness could also shrink consumer and enterprise checking balances at the same time that excess balances continue to stay in high-rate products. If portfolio rates increase another 50 bp, this will create another $250 million in interest expenses for the average bank with $50 billion in deposits.
What Can Be Done?
With this in mind, financial institutions have three key near-term levers to pull to get through the next six to 12 months: nimble data-driven scenario planning; a CD-retention playbook; and assessment of primary banking relationships along with refinement of the value proposition.
Scenario planning. Granular, data-driven scenario-based planning and forecasting need to include tactics for what-if scenarios that include flat rates, falling rates and higher rates for six to 12 months. Tools like Curinos Deposit Optimizers enable FIs to analyze various scenarios with ease to get a sense of the impact – even where there is lower probability for some scenarios – so they’re prepared to react, and can.
CD-retention playbook. An actionable playbook needs to include pricing micro-tactics based on customer behaviors, product preferences and changing market rates, and it needs to be fine-tuned with assumptions for weekly and monthly waves of renewals. That’s because customer expectations change as they get used to higher rates, which means the environment for CDs and customer behavior appears to change every month. The benefits can be material: the difference between top-quartile CD retention and the bottom quartile is 21% in balances retained and 33% in rate. With $1.8 trillion in maturities coming due in the next 12 months, even incremental moves can add up, and that’s where analytics can make a big difference (Figure 3). After nearly two decades of predictable deposit growth at low rates, many banks may not have the institutional memory for the level and intensity of deposit pricing that’s required.
Strength of relationships. At Curinos, we measure primary-bank relationship strength as checking balance performance and depth relative to the price sensitivity of rate-based deposit holdings. Along with reassessing the value proposition, relationship strengthening may require surgical optimization of distribution expense and effectiveness, both physical and digital. It may also require significantly increasing the sophistication of marketing through data-driven personalized targeting fueled by AI.
Figure 3: CD Renewals and Costs
Managing CD retention, guided by analytics, can make even incremental moves add up.
