Deposits360°® Monthly Industry Review
The following Review highlights key trends in the Deposits360°® Cross-Institution database and deposit forecasting models as of November 2022.
Banks and credit unions continued to actively manage deposit pricing in the face of 425 basis points of Fed tightening in the span of nine months. At the beginning of this cycle, the Deposits360° pricing model forecasted that institutions would delay their pricing response as rates increased, and that is exactly what happened. Due to the pace of increases, the model also suggested that the ability to lag would begin to abate in Q3/Q4, and that has also come to fruition. If rate expectations for 2023 materialize (5.00% terminal Fed Funds rate followed by 50bp of easing), the model predicts 44bp of additional non-maturity deposit rate increases by the end of 2023.
Many institutions have made the strategic pricing decision to hold the line on interest-bearing checking and savings rates, opting to retain portfolio balances or attract new money with time deposit specials and/or premium-rate money market accounts. In DCG’s Cross-Institution database, high-tier (>$1 million) money market accounts were priced as high as 2.87% (90th percentile) at November month-end. On the CD side, rate hikes were even more pronounced, eclipsing the levels we observed in the rate tightening cycle that ended in 2019.
Despite the dramatic increases in CD pricing that have materialized over the current tightening cycle, DCG’s models suggest that this train will be difficult to stop. We expect CD rates to continue to move higher, particularly as the delta to wholesale funding costs remains favorable to overall margins.
Net deposit balance outflows persisted across the industry in November. However, time deposit balances did grow for the third month in a row, offsetting some of the outflow in non-maturity deposits. Some non-maturity deposit balances shifted into CDs, as depositors moved discretionary funds into higher-yielding alternatives. This is particularly evident among institutions that rolled out premium-rate promotional accounts that had no barriers to entry (e.g., balance minimums, new money requirement, etc.).
We expect that deposit growth in 2023 will be more difficult to achieve than in recent years. Our predictive volume model projects continued downward pressure on non-maturity balances at current rate levels. If the terminal Fed Funds rate hits 5.00%, followed by 50bp of easing by year-end, we expect volumes to contract even further. This has meaningful implications for deposit growth strategies, as institutions would increase interest expense (via deposit rate increases or leveraging wholesale alternatives) to fund the balance sheet.
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