This Month In Commercial Banking
In a higher-for-longer rate environment, banks will face continued margin compression as asset repricing slows while deposit costs continue to rise. As of September, through-the-cycle portfolio betas for interest-bearing (IB) DDA and MMDA accounts reached 54% and 69%, respectively, and top-exception MMDA rates now rival those of money market mutual funds.
Against this backdrop, betas on earnings credit rate (ECR) DDAs remain significantly lower, at 10%, which reflects an average portfolio rate of 79 bp (Figure 1). In addition, ECR balances have proved stickier compared to interest bearing products: IB DDA and MMDA balances with betas under 10% experienced nearly twice the runoff of ECR balances with similar betas (Figure 2).
Figure 1: Through-the-Cycle Beta & Average Portfolio Rate by Product (Sept. ’23)
Figure 2: Rising-Rate-Cycle Deposit Growth
Mar 2022 – Sep 2023 | Deposit Accounts with <10% Beta
Attracting and retaining ECR balances has been a critical driver of success for banks with lower commercial portfolio interest expense cycle-to-date. But that tailwind could be subsiding.
As deposits surged on pandemic-related stimulus and the Fed took rates to zero, the vast majority of new commercial deposits landed in ECR DDAs because there was no rate incentive for corporates to find an alternative. As rates have risen, however, so too has the shift in mix toward interest-bearing products. At the end of September, ECR balances were roughly flat compared to pre-pandemic levels while the majority of the remaining net deposit growth had shifted to IB DDAs and MMDAs, or moved off balance sheet (Figure 3).
Figure 3: Deposit Growth by Product
Adding to the mounting headwinds: While ECR betas are low compared to other products, ECR rates have nonetheless doubled since the beginning of the rising rate cycle. The result is an increase in excess ECR balances (i.e., balances that go beyond those required to cover TM fees) despite continued balance rotation out of ECR into IB DDA and MMDA (Figure 4). While this is a testament to the stickiness of ECR balances, if rates remain elevated, more commercial customers will likely shift to paying hard–dollar bank fees and optimizing return on their cash.
ECR Rates Over Time
Excess ECR Balance (%)
To best prepare, banks will need to:
- Sharpen the focus on primacy and on winning treasury management relationships.
- Ensure discipline with respect to treasury management pricing events and periodically review discounts and waivers.
- Develop alternative pricing structures that ensure fair value exchange and preserve profit margins for customers willing to leave low-cost NIB balances in ECR and for those who prefer to maximize return on cash and pay bank fees directly.