Janet Yellen has spoken and the long-awaited yet slow-to-arrive second interest rate hike is upon us. On Dec 13, the short-term Federal Funds Target Rate moved by 25 bps to 0.75%, for only the second time in 8 years, marking a definitive shift to a rising rate cycle. While this rate cycle is likely to be less aggressive and more measured than the last one in 2004-06, the competitive, consumer and regulatory dynamics this time are vastly different. But not in ways that will make managing through this uncertain phase easy, let alone predictable!
Regional banks of all sizes, but especially those aspiring to fund high asset growth, are likely to feel the most pressure, surrounded as they are on multiple fronts. On one side are national banks who have capitalized on their extensive branch networks and broad product portfolios to deliver convenience and an ever stickier set of services to nearly 1 out 2 US households. On the other flank are an aggressive group of direct banks offering a potent mix of stellar mobile-first customer experience and above-market yields. And on the third front is the equities market setting new highs every week. All attractive options for your always-on, soon-to-be-mass affluent customer, the one who can not only compare but also move money at the touch of her smartphone button. And within the large US banks, Basel adoption will strengthen the competition for high-quality, LCR-compliant retail deposits.
This perfect storm of factors marks the end of the easy money era characterized by effortless, organic deposit growth, sticky customers and balances, and low interest expense. Now we begin a new jittery new ride up the deposits management roller coaster where banks will either need to re-price to retain yield-hungry customers or face run-offs. Nomis re-pricing estimates suggest that the typical top 50 US bank may see as much as a 52 bps increase in its cost of deposits per 100 bps in Fed Funds increase, which translates into $113 million in expense on a $30 billion depository. (For a high-level, interactive estimate of your at-risk balances and potential costs, check out the Nomis Portfolio Impact Modeler.)
Banks that are not prepared – or worse still complacent – in their use of first-generation elasticity-based pricing approaches will be the biggest losers. Smart deposit executives employing next-generation playbooks and approaches will snatch share from them. Those winning playbooks will combine price-elasticity, behavioral and customer value-based analytics with dynamic, self-learning models alongside front-line customer management techniques to both protect and grow their portfolios.
If you haven’t done so already, this new rising rate environment is your signal to conduct a risk analysis that moves beyond Treasury-centric analytics and aggregate constructs such as “surge balances.” This decidedly more customer- and product-centric approach should include:
Characterizing the run-off and re-pricing risk in your consumer product portfolio – both in terms of flight risk as well as migration to higher-yielding options within the bank
Classifying your customer base into profiles representing different risk levels, identifying those profiles that pose the highest risk both in terms of balances and income
Developing a high-level, strategic pricing playbook customized to your portfolio to help manage your run-off and re-pricing risk, including lead/lag, re-pricing, and the protection your “core” deposits.
Uncertain environments create both risks and opportunities, and while it’s good to be cautious, it’s better to be prepared. In the last cycle, the “wait and see” approach taken by some banks was an expensive choice indeed. Banks that have a thorough understanding of what’s at stake and how to protect it will have a plan for whatever market changes 2017 brings.