This Month In Commercial Banking
Curinos anticipates that competition for deposits will remain fierce in 2024 and, despite expectations to the contrary, the cost of commercial deposits will likely continue to rise. This stands to prolong the profitability challenge for the nearly three-quarters of banks that have identified deposit growth and retention as their top priority, even more so than managing their interest expense.
Banks came into 2023 facing a tightening money supply and customer funds moving off balance sheet in search of better returns. As of the third quarter, commercial deposits are down 6.8% Y/Y. Although the larger banks and many regionals have done better, others are down 20% or more. Looking at the deposit mix, there has been a 13 percentage point Y/Y swing toward interest-bearing products such as IB DDA and money market demand accounts (MMDA) (Figure 1).
Figure 1: Aggregate Commercial Deposit Mix (Y/Y, Oct. ‘23)
The aftermath of bank receiverships in March included a short–lived flight to perceived safety that has presented further challenges to balance retention, especially among bottom–quartile balance performers. Customers have been moving cash off balance sheet to money market mutual funds, seeking safety in an insured cash sweep (ICS) product or consolidating their positions with banks that are perceived as too big to fail. While the fear receded quickly for most, some of the banks that saw outflows in Q1 and Q2 have yet to see a reversion–to–the–mean bounce–back.
Looking to 2024, Curinos expects that overall portfolio cost will continue to climb, driven by these key factors:
- Continued balance rotation resulting from the 200-bp premium between IB products and ECRs and growing excess ECR balances.
- Remaining back–book interest-bearing deposits will gradually “wake up,” including the 24% of IB DDA balances below 25 bp and the 14% of MMDA balances below 100 bp (Figure 2).
- The need for banks to pay to retain or acquire commercial deposits at close to or above the Fed Funds–effective rate because retail deposits have gotten much more expensive on a marginal–cost–of–funds basis.
Figure 2: Portfolio Rate Dispersion by Product (Oct. 2023)
Asset yields remain flatlined, and this challenge will likely persist if the Fed cuts modestly in 2024. This will create even more pressure on profitability and increase the urgency for banks to navigate the profitability squeeze proactively. An effective approach is to secure and use data and analytics to price strategically to retain balances and to position for growth in cash-rich markets.
Banks should also review primacy and profitability by customer and align sales efforts to drive fair share and value exchange, along with optimizing the drivers of non-interest revenue, especially fees for treasury management services, and maintaining discipline in the pricing and structure of their cross-selling efforts.
