This Month In Commercial Banking
We’ve predicted that 2023 will be a challenging and eventful year for commercial deposits as competition heats up for a dwindling supply of available balances. The December non-farm payrolls and January CPI print both point towards the possibility of more Fed hikes and a “higher for longer” rate environment. Likewise, January commercial deposit data point to heightened competition as well.
Commercial deposit balances declined an average of 2.3% month-on-month during January. Meanwhile, ECRs faced even stiffer headwinds, declining 4.7% through the month. Pressure has been equally intense on the rate front, where through-the-cycle betas on interest-bearing products are now higher than they were at the end of the prior cycle. Average MMDA portfolio rates are now at 2.46%, equating to a 55% through-the-cycle beta.
Commercial MMDA Betas
Still, there is more pressure to come. Even after the large month-on-month rate increases in January, one quarter of middle market MMDA balances remain priced below 75 basis points. Additionally, higher ECRs will create the potential for more balances to move from non-interest-bearing accounts to interest-bearing accounts – pushing portfolio interest expense higher.
All of this reflects intense competition for deposits. It also points to increasing focus by commercial customers on the opportunity cost of leaving funds in non-interest-bearing accounts. Throughout 2023, we expect this will drive increased focus on enterprise funding optimization as the cost of marginal wholesale deposits moves upward. It will also force banks to carefully examine total relationship cross-selling, pricing and profitability as rapidly rising interest expense erodes margins.