This Month In Commercial Banking
Fed Funds rates are leveling off in a higher-for-longer range, but quantitative tightening continues. In this environment, commercial banks will have to balance the difficult tradeoff between deposit levels and deposit costs.
Curinos’ most recent data suggest that more and more banks are prioritizing the former, offering betas of nearly 100% to attract commercial deposits. And the strategy appears to be working: Deposit levels stabilized in July even as betas pushed well beyond the peak levels from the prior cycle of 2015 to 2018.
In July, the average commercial portfolio grew by just over 1% month over month after falling an average of 11.8% through the first half of the year. Even more encouraging, non-interest-bearing deposits were essentially flat month over month (See Figure 1).
Figure 1: Commercial Deposit Growth By Product Type
Where there was growth, virtually all of it came from money market demand account (MMDA) deposits, and the cost was steep. The average portfolio rate for commercial MMDAs rose from 3.44% in June to 3.59% in July, which pushed their portfolio betas up to 67% on a through-the-cycle basis. One reason for the portfolio costs is the increasing percentage of commercial MMDA balances priced at betas near 100%. In July, the percentage of balance priced over 5% was 28%, up from 24% in June.
The good news for banks is that customers are showing a willingness to deposit reserve balances with their banks rather than placing them in money market mutual funds – as long as the bank offers a high enough rate. This reflects a meaningful endorsement of improving confidence in bank stability.
The challenge becomes that, in a higher-for-longer environment, there’s plenty of room for betas to go still higher – even if the Fed were to cut rates by 25 to 50 basis points sometime in 2024. That’s because betas generally lag actions by the Fed. These continued challenges point to the need for analytically informed customer-level profitability models to better manage interest income, non-interest revenue and overall commercial profitability.