Deposits 2.0 - What to do in a Stable Rate Environment

 The battle for deposits continues in 2019, but the environment has changed markedly.  Those eye-popping rates, which seemed quite rational when the Fed was raising rates with some frequency, no longer appear to be an economically viable option.  Expansion of rate-exception authority is the most common method of handling the rate issue these days.  The main problem persists – the industry’s loan-to-deposit ratio continues to rise, and loans are growing faster than deposits.  What can the prudent banker do?

Consumer and small business deposit growth through the branch network system-wise was anemic in 2018, with a mere 3.3%, the lowest since 2014.  Overall deposits (including corporate and public funds) grew at 4%.  The good news is, CDs have melted away through a decade of low rates, declining from 38% of consumer deposits in 2008 to 16% in 2018 (which represents a rise from the previous year).  Low deposit growth was a nation-wide phenomenon, although, as expected, some markets grew faster than others.

As digitization continues, we expected the megabanks to gain more than their fair share of deposits – and they have – but credit unions posted a surprisingly strong 6% deposit growth number in 2018, and a 6.4% growth over the past 5 years.  Among banks, the >$100B banks grew deposits at 4.3% annually in the past 5 years, while $20-$100B banks grew only 2.8% for the same period, and smaller banks grew at 3.7%, enjoying local loyalty.

At the same time, branch count declined for the 8th year out of the past 9.  Banks and credit unions reduced their footprint by 1,700 branches in 2018 (closures reached 2,500 that year, but branch openings still hover around 800-1,000 annually); the last four year branch contraction was a mere 6% of the total.  Interestingly, in 25% of branch closures, the institution maintained another branch within a MILE of the closing office; and in 50% of the closures the distance was 2 miles.

Another meaningful change in the competitive environment since the great recession has been the increasing concentration of the industry, with the largest 10 banks owning 33% of all branches nationwide and over 45% of all deposits.  This can be attributed to several factors; my “take” on the shift is the increasing importance of the digital experience in customers’ definition of convenience, where the largest banks have a meaningful scale competitive advantage.  Chase alone spends on technology $11B annually, and nearly $2B of that amount is dedicated to digital innovation.  Several banks have followed suit, and some are creating mobile-first brands.  As digital deposit offerings proliferate, so does the pressure on branch-bound deposit pricing, as direct banks can offer much higher rates due to their lower operating costs.

During the past five years, banks have experienced NIM (net interest margin) expansion primarily through moving cash from securities into loans.  In addition, they were awash with low-rate and interest-free deposit inflows as the opportunity cost of parking money at the bank was near zero.  Over the past five years loan-to-deposit ratios system-wide have tightened to the point that banks are now full (from 80% at the trough to well over 90% today), and securities portfolios are generally depleted.  Further, the yield spread between loans and securities, a proxy for risk-adjusted returns, has tightened as well.

As rates started rising, loans betas were much higher than deposit betas for a while.  For every basis point of the Fed rate hikes, loans reflected 80% of that rise, while deposits dragged their feet at 20%.  At some point banks had to recognize the need for deposit growth, and today deposit betas outpace loan betas, causing core spread tightening.  Given the flat yield curve and limited opportunity to further enrich earning assets and liability mixes, the pressure on NIM is increasing.

In the midst of this trend the consumer has awakened and is starting to rate shop.  Technology advances have empowered the consumer, and they can now shop rates efficiently throughout the banking system.  Google searches for “savings account” are near all-time highs; searches for “certificates of deposit” are at a seven-year high.  These forces are likely to bring about deposit dislocation if banks do not take proactive action to retain their precious deposits.

Consider some of the best practices for deposit gathering below which came from Scott Hildenbrand, a principal and the Chief Balance Sheet strategist for Sandler, O’Neill.

• Monitor the competitive landscape dynamically; do not ignore national or remote players.
• Leverage real-time analytics to understand customers’ needs and wants
• Invest in new technology and pursue franchise-enhancing partnerships, but recognize that service, convenience and brand will always be your competitive differentiators
• Consider starting an online bank, if only to connect risk and marketing
• See your brand, not deposit products.  Tier deposits thoughtfully and be leery of rate concessions
• Incent your lenders to be your best deposit gatherers
• Explore all on- and off-balance sheet levels to give customers what they want

In addition to Scott’s ideas, I have a few of my own:

• Meaningfully improve your customer and industry targeting at the commercial and wealth businesses to focus on deposit-rich niches
• Improve your value proposition to bring the entire bank to bear and focus on value-creation for your customers, shifting from product-specific strategies
• Creatively think through loyalty-building methods that leverage your own resources vs. partnering with external loyalty programs; give your customer reasons to bank with your well beyond rate (such as access to experts if they increase their deposits with you etc.)
• Identify the top ten friction points for consumer, commercial, wealth and treasury management customers and focus on addressing, at minimum, the top five in each business (just ask your call center bankers and the RMs assistants; they know)

There are many more such ideas.  The common theme here is to go beyond technology.  We can’t compete with universal banks on technology investments and brilliant digitization.  We CAN nimbly and creatively employ your people and brand to bring value to your customers while utilizing some technology but not solely relying on it.  

Deposits are the lifeline of our business and the #1 determinant of market value.  It’s critical to continue and refine your deposit gathering strategies and increase expectations from the entire bank’s salesforce to bring those in.  Deposits are not solely the domain of the branch network and the retail business.  They should be prioritized and gathered by all LOBs as an integral part of the presentation to customers and prospects.  The right tone from the top will bring this message alive and will leverage your excellent brand and people resources to generate even better, more stable funding for your institution in the future.