This Month In Commercial Banking
Even though the Fed sat out hiking rates during the June meeting, commercial customer behaviors didn’t miss a beat. During the month of June, with no change to the Fed Funds rate, average portfolio rates on commercial interest-bearing DDAs increased 21 bp, from 2.55% to 2.76%, while commercial money market demand accounts (MMDA) portfolio averages increased 17 bp, from 3.28% to 3.45%. (See Figure 1.) These data foreshadow the challenges that lie ahead for commercial portfolios if, as expected by market participants, the Fed Funds rate settles into a higher–for–longer range after another hike during the July FOMC meeting.
Figure 1: Average Portfolio Rate for Commercial Interest-Bearing Products
Balance outflows moderated in June, with the average commercial portfolio down .4% month over month, which is a significant improvement over the year–to–date average of nearly two percentage points of outflows per month this year. But there’s a catch. Beneath the headline number, earnings credit rates (ECR) DDAs declined fully 3.4% in June alone. (See Figure 2.) As Curinos has noted in earlier articles (Curinos Review, June 28; This Month in Commercial Banking, May 31), betas on ECRs have significantly lagged betas on interest–bearing products. In June they were a mere 76 bp. As a result, customers increasingly have been doing the math. They’re moving balances to higher–yielding alternatives and paying their bank fees out of pocket. This dynamic will present additional profitability challenges because, even with good pricing discipline, the fees banks earn for treasury management services are typically insufficient to make up for an incremental 2% to 3% of interest expense on their customers’ deposits.
Figure 2: Commercial Deposit Growth by Product Type (May 2023 to June 2023)
In navigating these complex markets, there’s no one simple solution. To succeed in the long run, perhaps the best strategy is to build a granular portfolio of primary relationships. In the meantime, bankers can employ these three tools to optimize their decision making. First, have a clear funding playbook to enable fast and informed decision-making as rates continue to climb across customer segments. Second, invest in profitability–management tools that can respond to rapidly shifting relationship profitability dynamics as rates and balance levels shift at dizzying speeds. Finally, don’t shortchange the treasury management pricing event. While fee increases can’t fully offset the rising cost of funds, they can blunt the impact. Taken together, these tools will help bankers make faster and better–informed decisions about how to optimize profitability from the customer level up.
