This Month In Commercial Banking
During the extended low-rate environment of the 2010s and then the pandemic, commercial banks were able to expand the portion of their gross treasury management (TM) fees captured after earnings credits. By late 2021, this fee–capture rate averaged more than 80%, with some leading banks capturing more than 90%. These high levels persisted through much of 2022, even as earnings credit rate (ECR) betas remained historically low in the first months of the rate cycle (Figure 1).
Figure 1: Annual Fee Capture Rates (Net TM Fees After Earnings Credit / Gross TM Fees)​
By late 2022, ECRs were rising – this includes the first broad movements in standard ECRs in more than a decade. As a result, annual fee–capture rates fell from 80% on average in Q4 2021 to 66% by the end of Q2 2023. On a base of $50 million in gross TM fees, this translates to a revenue drop of $7 million per year. The decline has been consistent across banks of all sizes, with each quartile seeing a drop of from five to 15 percentage points (Figure 2). Annual fee capture hasn’t been this low since before the 2008-09 financial crisis.
Figure 2: Annual Fee Capture Rates (Net TM Fees After Earning Credits / Gross TM Fees)​ 2Q22 vs. 2Q23 by Quartiles​
Even with lower betas in this cycle, average portfolio ECRs have more than doubled, from 30 bps to 80 bps (Figure 3). The increase has more than offset the impact of the 37% year-over-year decline to ECR balances since the peak of the pandemic-era deposit surge. This is despite the fact that the 10% ECR betas have significantly lagged the 30%+ betas of other commercial deposit products on a through-the-cycle basis.
Figure 3: ECR YoY Deposit Change vs. ECR Portfolio Rate​
Stabilizing revenues in these challenging times hinges on optimizing TM pricing and aligning fee and ECR strategies. Banks need to periodically validate that they’re charging for all services being delivered and at prices that align with growth goals.
From Curinos’ experience, finding ways to integrate a view of a bank’s primacy position with individual clients or across a segment into its pricing decisions is the gold standard of TM optimization. In addition, banks need to align their TM fee and ECR strategy to ensure that they treat customers consistently. These considerations include whether clients receiving deeply discounted fees should also receive top-of-market ECR rates.
In this untested environment, adopting these strategies will help banks soften back-book pressures on ECR and potential impacts to net-fee generation as market rates peak.
