This month’s Review highlights key trends in the Deposits360°® Cross Institution Analytics database and deposit volume and pricing models.
DCG recently polled Deposits360° subscribers with the following question: What are you expecting for deposit growth in 2024? More than 80% of responses fell in the -4.00% to +4.00% range. The most popular answer was 0.00% to 2.00%. If we consider the balance trends playing out in DCG’s database, expectations for any non-maturity deposit growth in 2024 would qualify as an optimistic outlook for many institutions. For the 15th month in a row, we observed negative month-over-month growth rates in NMD portfolios.
Market indications are signaling not only that the current cycle may be peaking, but that the Fed may have to begin cutting rates in the 2nd quarter of 2024. Even if the Fed were to cut rates by 100 basis points over the next 12 months, DCG’s volume models are projecting NMD levels to contract another 8%. Budgeting for 2024 will require a close look at how much any potential NMD outflow might be retained in time deposit portfolios.
Considering that NMDs have contracted while time deposit portfolios have grown over the last year, one might wonder how this has impacted overall deposit mix levels. As illustrated below, CD balances as a percentage of total deposits have now reached pre-pandemic levels at approximately 22%. However, given that the rate environment is much higher than at beginning of 2020, CDs may continue to attract rate-sensitive depositors looking to park discretionary funds.
DCG’s Deposits360° pricing models forecast that non-maturity deposit rates may increase 17bp to 1.36% over the next 12 months if the Fed holds rates at current levels. If economic conditions cause the Fed to cut rates by 100bp, the average NMD rate is still projected to increase by 3bp due to the lagging impact of recent hikes.
Throughout the current tightening cycle, DCG has been tracking the spread between newly opened 1 Year CD Specials and 1 Year FHLB borrowings. At the peak of the last tightening cycle (Q4 2018), this spread was about 80bp. Early in the current rate cycle, FHLB rates increased faster than CD pricing, resulting in spreads exceeding 150bp. However, as shown in the following chart, CD Special pricing has caught up to the point where the spread to FHLB is now consistent with levels observed in the last cycle. This may be an indication that 1 Year CD Specials have reached their short-term ceiling if the Fed maintains its current rate level.
Looking at rate trends for all deposit types, we see further evidence that the most competitive CD rates across the 1-to-36-month term spectrum have lost upward momentum. The 90th percentile rate levels for these terms remain in the 5.00% - 5.35% range for the second month in a row.
Darling Consulting Group will continue to monitor the Cross-Institution data in Deposits360° and bring you insights to help you manage your deposit portfolio.
To learn more about how DCG's Cross-Institution analytics can help drive strategic decision-making, click here.
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