Myriad Factors Are Driving Bank Actions As Rates Continue To Rise


deposits.pngBanks across the spectrum have begun increasing deposit rates after years of remaining at historic lows. In addition to Fed increases, a number of factors appear to be at play in driving initial bank actions, and will likely drive future changes. I had the opportunity to discuss how banks are assessing this situation during a recent BAI Beacon panel session I led. Three key factors emerged.

1. Consumer Deposit Balance Growth is Slowing

While the amount of deposits in the system grew dramatically over the past 10 or so years, an impending contraction of total deposits now seems likely, both as a result of consumer behavior and due to larger systemic, policy-driven influences. This likely won’t come as a surprise to many deposit managers, as slowing deposit portfolio growth has already been a common topic of discussion in my conversations this year.

There are no easy explanations and likely no sole drivers of this trend. It could be that households are looking for higher returns as confidence in the economy ticks up, and therefore deploying their money elsewhere. As I’ve observed before, this is also likely related to the continuing trend of consumers spreading their deposit dollars across an increasing number of institutions, as direct banks and other non-traditional competitors continue to increase in relevance.

Whatever the causes, this trend is sure to influence the way banks are thinking about deposits as we move forward. Matthew Monks, who covers the financials sector at Bloomberg, offers an analysis of the recent JP Morgan report “Core Deposits Strike Back,” which details the potential impacts of contracting deposits on the system, and their view of a pointed impact on midsize U.S. banks (which they classify as those with $50 billion in assets or less). Explaining a potential “dash” for retail deposits that may lie ahead, Monks quotes JPMorgan’s report directly in cutting to the chase:

"The need for retail deposits to fund loan growth, the challenge of organically originating new relationships and the scale required to support technology and brand investments will drive consolidation."

- JPMorgan Tells Banks to Partner Up as U.S. Deposit Drain Looms, Bloomberg, May 8, 2017

2. Large Banks Are Flush With Cash

A recent Forbes article discussed the interesting dilemma that some banks simply aren’t looking to attract more deposit balances, regardless of their historically low cost:

"The problem is that banks don’t have much need for deposits. Sure, they are making loans, but they still have plenty of money left over. Banks have substantially more deposits than loans now, so they are not anxious for savers to walk in the doors. They like the relationship with depositors, which provides the potential to make loans and sell other services, but the deposit itself isn’t worth much."

- “Why Are Banks Paying So Little Interest on Deposits?” – Forbes, October 17, 2017

While true in pockets, I typically find any insight that addresses ‘banks’ as a whole to be oversimplified – and that’s certainly the case here. In reality, even those large institutions who find themselves flush with deposits are pursuing divergent strategies with regard to deposit growth, and using a variety of tools to carry out those plans.

For some, a strategic ‘stockpiling’ of deposits appears to be the goal — though the true prize sought appears to be the customer relationship and not the deposit balances, per se. In this rich-getting-richer scenario, appeals are made to customers in line with the goal of acquiring the full relationship — often through the use of targeted marketing and cash offers to bring over their banking relationship.

For others that could be lumped into this ‘flush’ category, there is both a reluctance to pay up for deposits and a parallel concern around the potential for relationship attrition. While prevailing wisdom might suggest that allowing the run-off of your most rate-sensitive customer balances isn’t a bad thing, most of these banks are now realizing that operationalizing this strategy with some level of precision requires accurately identifying the customers affected and quantifying the holistic impact to the bank. And not many are feeling too bullish about being able to do this.

Yes, the largest banks have been predictably much slower to move deposit rates, but I would caution accepting this narrative at face value. The value of core deposits to the bank cannot be overstated, and most are gearing up for a more competitive landscape ahead.

3. Consumer Savings Has Become Polarized

Most would agree that the average consumer has not yet seen enough upward movement in deposit rates to spur them into action. One could argue that the very idea of saving has become somewhat of an afterthought, with household savings rates steadily decreasing and a recent Fed survey showing an alarming number of people unprepared to deal with a relatively modest financial challenge. Given these trends, and some recent news on initial bank actions to the rising rate environment, I see some cause for concern.

It’s no secret that the gains from the economic recovery have been largely localized in the top one percent. As we discussed during the BAI Beacon session, this in turn has resulted in wealthy households having an outsized impact on bank deposit portfolios, with benchmarking estimates of nearly two-thirds of deposit balance growth coming from these households. Consequently, it’s no surprise that banks would be keenly focused on these customers as the environment shifts. Indeed, a recent WSJ article highlights how banks are rushing to attract and retain the deposits of their wealthiest customers.

But what does this mean for the average saver banking at a large institution? Less attention from the bank, it would seem. With deposit base rates showing only the most modest signs of movement (those most applicable to people with little savings), it’s unlikely increasing rates will do much to reverse the system-wide reduced focus on savings in the near future. For those uninterested or unaware of other savings opportunities outside their primary bank, the malaise of low savings rates is likely to continue.

With direct banks offering a more egalitarian view of savings, favoring transparency and no-fee/no-minimum product structures alongside top of market rates, a migration of this largely forgotten saver population seems inevitable. When there will be enough incentive for that trend to gain more steam, and how deep of an impact it may have on traditional banks, is anybody’s guess.

About The Author

Brian Buckingham is the VP of Deposits, US, at Nomis, working with clients to implement best-in-class product and pricing solutions that enable deep customer understanding and data-driven decision making in a rapidly evolving market.