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BirdsEye View

 Universal banks are beginning to shed deposits, asking their largest depositors to pack their bags and move elsewhere.  Deposit carrying costs are still high, and slack loan demand coupled with extremely low investment rates leave many banks negatively margined on access deposits that can’t be profitably deployed.

At the same time, we know that core deposits are a primary driver of long-term franchise value creation.  What is a CFO to do?

Plus, we are all eyeing our branch networks, looking for more efficiencies; but the question persists, is this the right strategy for us, the non-mega banks?

The economy continues to recover as well, but some permanent changes are taking place.  What should banks do to address those?

This article outlines the changes COVID brought to our economy and consumer behaviors, and some of the implications associated with these changes.  I have discussed before implications on digital strategy, branding and the commercial side.  This time the conversation is more retail focused.  

Here are the facts, thanks to the excellent data and insights gathered by the folks at Bancography:

• After two consecutive years of deposit declines, US deposit growth skyrocketed in 2020, growing by 21%.

• Deposit mix also improved meaningfully, from 38% of all deposits held in CDs in 2008 to a nadir of 14% in 2014.  Incremental deposit growth was parked primarily in savings accounts, reflecting consumer reticence to give up liquidity in such uncertain times.

• Every bank size-group showed above-normal deposit gains in 2020, but the largest banks gained the most, closely followed by credit unions.  $1-20B banks gained the least amount of deposits, underscoring the difficulties of operating a mid-size bank (where you can’t out-local the nationals and out-national the locals).  This trend has persisted over the past four years. 

• Deposit growth was spread across branches as well.  In most years, says Bancography, only about one third of branches surpass $3M in deposit gains; in 2020, 72% of mature branches exceeded that benchmark.

• Consumer savings rate has been generally consistent at 7-8% in the two decades prior to 2020.  It has exceeded 33% in April 2020, and while declining in summer 2020 to “only” 15%, it spiked again in January 2021 to 20% and remained heightened at 14%.  The money is not tied up in CDs, as mentioned as well, but in invested instead in liquid accounts.

•  Branching continues to be concentrated, with 250 banks controlling 70% of all branches, and the top ten controlling 33% of all branches.  This is especially relevant because consumers continue to name “branch location” at the #1 reason for selecting their primary checking provider.  Anything else – fees, balance requirements, account aggregation, word-of-mouth – all pale by comparison.  Per the FDIC, 83% of all Americans visited a branch at least once in 2019.

• Consumer debt has also undergone a seismic shift.  While auto sales have rebounded, credit card balances declined 9% from 2019 to 2020.

• Consumer spending is meaningfully down (16% down April 2020 vs. April 2019), and has only recently returned to pre-pandemic levels.  Ditto for consumer confidence as measured by the Conference Board.  It took these measures roughly a year to recover.

• Consumers are also enjoying an unprecedented growth in the equity values of their homes, with owners’ equity reaching 66% of total home value.  Consequently, the trend away from home equity borrowing, which started in 2008-9, persisted.  Total home equity balances sit at $440B, the lowest level since 2001 and 49% of the 2007 peak.  Current average utilization is at 44% vs. 57% in 2010.

Bancography goes on to identify numerous challenges our industry is facing in the post-CVID era.  I spoke to many of these in previous issues of BirdsEye View, but they are worth repeating.  Here are some joint observations:

1. While the country is slowly moving toward normalcy, a.k.a. economic recovery. COVID did inflict structural damage and fundamental shifts in our economy that will impact bankers and bank balance sheets in the near future.

2. The system is now awash with liquidity, which, as mentioned above, creates earnings challenges.

3. Loan demand, excluding CRE, declined steadily during the pandemic, and is now $400B (14%) below the peak of April 2020.  February and March saw C&I loan growth turn minimally positive for the first time in nearly a year. Loan-to-deposit ratios are still extremely low and well below historic norms.

4. Economic recovery remains slow and uncertain.  While the worst is over, major challenges remain:

a. WFH is here to stay, at least as a hybrid model.  As commercial occupancy rates are permanently curtailed, so does the income generated from these income producing properties, which impacts both credits already in the portfolio as well as credit-worthiness of certain sectors going forward.

b. The retail sector has experienced similar major shifts to office space, causing a “retail apocalypse” and wholesale store closings.  The impact on today’s and tomorrow’s bank loan portfolio is similar to the commercial space comment.

c. Consumer debt performance remains uncertain, since forbearance and numerous stimulus payments masked the underlying strength (or weakness) of the consumer segment.  Mortgages, auto loans, rental payments and other payments were further protected by specific programs.  Once they expire, especially if that happens before the consumer finds employment, the credit performance of these portfolios will deteriorate.

d. COVID forced businesses across the board, including banks, to modify their business models for greater efficiencies.  For example, restaurants pivoted to delivery and curbside pickup, reducing their need for server staff.  This, in turn, reduces their operating costs run-rate, which might reduce their future working capital borrowing needs (but also might increase their profitability).

e. The number of permanent job losses exceeds 3 million jobs at this point.  Full recovery won’t be in place until those jobs are replaced by new job creation. Plus, current unemployment levels are still 2% below full employment levels…

These mega-trends have profound implications to your branch network:

• Do you have branches serving office workers?  If so, will they be viable when these offices are closed or the workforce reduced due to WFH taking root?  Is it time to reevaluate those branches and find alternatives to serve the dwindling customer base?

• The decline in retail space has parallels in banking as well, although consumers’ #1 bank selection criterion – branch location – conflicts with this trend.

• Alternative delivery models, including ITMs, appointment banking, banker-at-a-distance, call center expansion including live chat, purely online account opening and others, offer alternative high-service delivery models that will displace the branch model in many markets.  Many of these channels offer extended hours, and therefore perceived greater convenience. 

• As you reduce sales outlets, such as branches, you must consider how you can replace that pipeline and presence with convenient alternatives that are true to your branch and go-to-market strategy, while recognizing the perceived value of branches as point-of-sale, which has been durable for decades.

Much more can be written about the post-CVID retail world.  I hope this discussion triggered some thoughts in you for further conversations and creative evaluation.  The key words that served us all well during this crisis are “test and learn” and “flexibility”.  Employ both as you question some of the very basic assumptions we took for granted until now, especially in the retail segment.  It is time.