What is it costing you to raise liquidity at the margin?
This is the question that is confusing models, decimating budgets, and sending margin into a downward spiral.
The industry is still reeling from the shock-and-awe Fed tightening cycle. The wide spread between low-cost non-maturity deposits and market rates has completely disrupted what was an otherwise sleepy deposit market for the past 15 years.
Darling Consulting Group’s Deposits360°® data analytics solution (with billions of relationship-level data records from ~300 institutions across the U.S) offers some eye-opening statistics through Q3:
Non-maturity deposit balances are down and time deposits have been up for 13 straight months
Time deposit portfolios have increased by 38% year-to-date through Q3… however, 45% of that growth shifted from non-maturity deposits… the uplift in cost to retain those deposits was 374 bps
Deposits360°’s predictive analytics suggest that non-maturity deposit balances could decline another 10% over the next year, assuming rates remain flat
Source: Darling Consulting Group Deposits360°
Furthermore, the industry faces waves of time deposit maturities next year, and top-tier CD specials in most markets are well over 5%. So, the dilemma is this: how do institutions balance the desire to retain time deposits without over-cannibalizing non-maturity deposits? This seems like an impossible equilibrium, but the cost of cannibalization can be a silent assassin to margin.
All of this is culminating in potential higher funding costs and lower margins for 2024. But it’s also the area for the biggest upside in terms of winning basis points, if managed proficiently.
As we head into next year, here are four focus areas to consider as you position your institution to win funding cost basis points.
1) Bifurcate CD Offerings
Pose this question to your ALCO: is your goal to grow or to retain time deposits? The answer should help structure your time deposit offerings. Try creating a menu of options and bifurcate products that meet individual goals and that are distinct for retention and growth. If top competitor offerings are over 5% in your market, then how are you differentiating from your competition? Most importantly, closely track cannibalization trends and quantify the marginal cost of funds on deposit promotions.
Email Joe Kennerson to learn how to quickly calculate the marginal cost of funds on deposit specials.
2) What's Next for MMDA/Savings?
This question is undoubtedly keeping bankers awake at night. Pricing up today elevates interest expense with the risk of not changing the outflow trends. Offering a new product risks high cannibalization from lower-costing deposits. The truth, however, is that those concerns are already playing out. No easy solution here, but everything should be on the table. Here are three areas in which DCG has been strategizing deeply with clients:
Sketching out new product offerings and how to roll them out to the marketplace – it’s never too late
Looking closely at how to price tier concentrations
Evaluating mid-tier relationships, a segment that may be overlooked and fueling attrition
Click to watch how DCG's predictive Deposits360° solution can help with price setting and forecasting.
3) Grass Roots Efforts
Can you identify early warning signs of attrition and attack it? This takes a delicate balance of data analytics and a strong salesforce, both of which are experiencing a paradigm shift in our industry. Areas of focus may include single source depositors, relationships that are experiencing consecutive months of balance declines, and newly minted accounts that haven’t fully onboarded. This will take work, but as the funding cost outlook suggests, it’s time worth spending.
4) Data, Data, and More Data
Guess work and reacting to the competition does not create an edge in this environment. What does set winning institutions apart is their focus on objective, data-driven decision-making. Here are three examples where DCG client institutions established big wins by effectively harnessing deposit data:
Segmented relationship-level data to develop a set of new MMDA specials designed to promote growth and deepen relationships
Quickly identified a highly cannibalized deposit special and pivoted to new offering before the marginal cost of funds accelerated
Identified patterns of depositors-at-risk and developed targeted call lists; additionally, pulled attrition lists on targeted win-back campaigns
As financial institutions, we have tremendous access to data. It’s time to unlock it.
We are living through the most competitive deposit environment of our careers. Continued attrition and deposit mix change are inevitable as the Fed continues its quest to lower inflation. Margin pressure in 2024 will be intense. It also is the area in which we can win the most basis points against that margin pressure. How will you prepare?
Learn more about DCG's Deposits360°® solution and how data-based strategy can help position institutions to win funding cost basis points.
ABOUT THE AUTHOR
Joe Kennerson is a Managing Director at Darling Consulting Group, developing custom balance sheet strategies with ALCOs throughout the country. DCG’s Deposits360° solution captures relationship-level data for financial institutions with a goal to track cannibalization, quantify the marginal cost of funds on deposit specials, forecast volume and rate expectations, and most importantly, develop effective pricing and product strategies.
Contact Joe Kennerson: jkennerson@darlingconsulting.com or 603-498-5852.
© 2023 Darling Consulting Group, Inc.
