Threading the needle between deposit runoff and increasing costs is becoming more difficult. Even during Fed plateaus, interest expense tends to increase, largely because of rotation of deposits from the back book to the front book. According to Curinos projections, deposit growth will continue to be below historical averages at least through 2024 (Figure 1).
Figure 1: Monthly Average Customer Balance Projection | Total Deposits | Jan '19 -Dec '24
The most significant profitability challenge in the near term is upcoming CD maturities, which will happen in two waves.
In the first wave, extending into the first quarter of 2024, lower-cost CDs (ranging from 2.00% to 4.00%) will mature into a higher-rate environment. This means striking a balance: pushing for renewals at a meaningful increase to interest expense versus limiting that expense at the risk of increased deposit runoff.
In the second wave, with rates already above 4.00%, expense pressure will increase and margins will decrease in anticipation of falling market rates. This is because CD holders at renewal will shop rate, which creates churn. Timing of the second wave will depend on the general consensus of when the Fed will start cutting rates.
Perhaps more than ever, deposits are determining bank profitability. But the good news is that, because of their influence, deposits can also be used as a lever to improve profitability in the future. That requires analytically driven decision-making using data that is based on near-real-time customer behavior and competitive activity.
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