Deposits360°® Monthly Industry Review
Deposits | Analytics | Interest Rates
This month's Review highlights key trends in DCG’s Deposits360° Cross-Institution database and deposit pricing/volume forecasting models.
Pricing Trends
Deposits360° forecasts at least 26 basis points of rate increases within non-maturity deposit portfolios over the next 12 months. However, if the Fed finds a reason to continue hiking and the effective Fed Funds rate reaches 5.75% - 6.00%, then we project non-maturity deposit rates to increase 50 basis points. In either scenario, the pent-up pressure within deposit portfolios should continue to push overall costs higher in the short term.
As we enter year two of the Fed’s current rate tightening cycle, there are some pricing trends that are worth noting. Many institutions have limited net deposit outflows by offering CD specials and premium rate savings products. The terms on CD specials were in the 12- to 24-month range at the beginning of the cycle, but now they are getting shorter. The biggest 3-month changes on CD rate sheets have materialized in the 1- to 5-month and 6-to 11-month buckets. We note that while MMDA pricing increases have thus far been targeted at balance tiers that require more than $250k, we also see some increases in the $100k-$250k tiers. This suggests that depositors who are in the mid-range of existing balance tiers are becoming more sensitive to market dynamics and shopping for better yields – and institutions are responding.
Lastly, on the pricing front, DCG has been monitoring the spread between 1Yr CD Special offering rates versus the 1Yr FHLB Advance rate. For the first 12 months of the current tightening cycle, the spread was considerably wider than what we observed in the last tightening cycle. However, the combination of a slower pace of rate hikes and the catch-up effect observed in CD offering rates has returned this spread to better align with historical observations. This may be an early indication that CD pricing has begun to stabilize. Further Fed hikes or wholesale funding curve volatility could alter this narrative.
Balance Trends
Turning to balance trends at the Cross-Institution level, CD growth rates trended upward relative to last month. For the second consecutive month, this CD growth offset further contraction in NMD portfolios, resulting in another month of net positive growth at the total deposit portfolio level.
The Deposits360° volume model forecasts continued challenges ahead for non-maturity deposits. We are in unchartered waters, given the speed with which the Fed has increased its benchmark index by 500 basis points. Not only has inflation led to deposit drawdowns, but more depositors are taking notice of the spread between what they are being paid and what they can get at other banking institutions and financial intermediaries. Both of these factors have led to higher rates of decay across product types. As a result, our near-term outlook calls for continued non-maturity deposit outflows in a Base, Up100, or Down100 rate scenario.
Another contributor to climbing decay rates is the meaningful portion of excess deposit growth realized during the COVID pandemic that has continued to run off balance sheets. To some extent, this was an expected outcome when considering the Fed’s quantitative tightening policy. At the industry level, 25% of surge funds have already run off. Another 50% drawdown would further exacerbate NMD attrition.
Darling Consulting Group will continue to monitor the Cross-Institution data in Deposits360° and share insights to help you navigate the ongoing competitive rate environment.
To learn more about how DCG's Cross-Institution analytics can help drive strategic decision-making, click here.
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