This month’s Review highlights notable trends and projections in DCG’s Deposits360°® Cross Institution Analytics database and deposit pricing and volume models.
Balance Trends
Is the losing streak over? Preliminary data suggests that February 2024 had net NMD growth of 1.09%, snapping a 19-month NMD runoff streak. Two of the main factors driving this bump are:
Seasonality: February and March are typically strong growth months for NMDs. It would not be surprising to see NMD growth again at the end of April.
Burnout: The last Fed hike was in July 2023. The longer rates stay flat, decay should normalize as depositors are less likely to seek higher returns elsewhere.
Source: Darling Consulting Group Deposits360°®
The market consensus on Fed rate cuts has changed considerably since the beginning of this year. In January, the market was expecting six cuts in 2024. As of April 2024, that number is now one-to-two cuts. Few (if any) signs indicate that a cut would be likely at this time, as unemployment remains low and CPI continues to exceed market expectations. While NMDs may have grown in February (and likely in March), DCG would still expect further non-maturity deposit balance contraction of about 5% assuming rates are cut by 100bps over the next 12 months. Will a portion of this runoff continue to shift into your institution’s time deposit portfolio?
Source: Darling Consulting Group, Deposits360°®. Note that this chart does not include the surprise increase in NMDs in February as all institutions have not yet fully reported.
Average non-maturity balances rebounded slightly in February (+1.08%), while average CD balances increased at a faster pace (+2.75%). At the total deposit level, the average account size increased by 1.54%. Many Deposits360° users have been focusing on winning back funds from depositors who have reduced wallet share. Deposits360° allows institutions to develop targeted win-back campaigns that isolate customers who fit specific criteria, such as having multiple account relationships, showing a trend of steady balance outflow, or having a long relationship history.
Source: Darling Consulting Group, Deposits360°®
Signs are also beginning to emerge that Regular CDs are making a comeback against CD Specials when comparing the total balance sheet allocation for each product type. CD Specials saw their first drop of this rate cycle in February, and Regular CDs have been picking up momentum as additional CD Specials mature and roll over into their regular-term counterparts. The new Data Explorer module in Deposits360° allows users to see these trends at the institution level and compare trends at the Cross-Institution level. Now is the time to align on a game plan for upcoming CD maturities and a communication strategy to high-value depositors.
Source: Darling Consulting Group, Deposits360°®
In CD portfolios, Attrition % and Early Withdrawal behavior continue to trend down as depositors become more “burnt out” from shifting funds – a concept described in DCG’s recent article “Burnout in Deposit Behavior” (available exclusively to Deposits360° subscribers). CD attrition that results from depositors seeking higher yields elsewhere should continue to subside with more distance from the Fed's last rate hike.
Source: Darling Consulting Group, Deposits360°®
Pricing Trends
It has been more than eight months since the Fed’s last rate hike (+25bp at the end of July 2023), and deposit costs are still moving incrementally higher. Total deposits moved 3bps higher over the last month, while non-maturity portfolios moved up 2bps on average. Within money market portfolios, the largest pricing gains occurred in the $100k - $1MM tiers. However, newly funded time deposit rates are 6bps lower than last month, and 9bps lower over the last two months, indicating that bankers are increasingly focused on executing price reductions on intermediate-term Special CDs (6-to-36 month) and rollovers.
Source: Darling Consulting Group, Deposits360°®
The next two graphs provide further support that deposit rates are approaching their cyclical peak (assuming that the Fed is done hiking in this cycle). The first graph shows newly opened MMDA rates. The average interest rate on newly opened MMDAs increased by 16bp month-over-month, but the 90th percentile rate dropped by 14bp, indicating that institutions are beginning to selectively reduce their most competitive offering rates in the face of potential market rate cuts in the second half of 2024.
Source: Darling Consulting Group Deposits360°®
The next chart looks at pricing on newly opened 1 Yr CD Specials. Over the last month, rates moved lower for all rate percentiles. It is worth noting that the spread between wholesale 1 Yr FHLB advance, and 1 Yr CD Specials has narrowed considerably, and this spread doesn’t even account for any FHLB dividend that an institution may be receiving on the capital stock required for taking out advances (this dividend typically translates to 10-20 bps in rate depending on the declared dividend amount). With the large wave of upcoming short-term CD maturities, many institutions are weighing the option of selectively lowering existing CD special rates or adjusting regular term CD pricing to retain maturing balances.
Source: Darling Consulting Group Deposits360°®
The Deposits360° pricing model projects an additional 8bps of non-maturity deposit rate increases over the next 12 months if the Fed maintains its policy rate at 5.25%-5.50%. If current market consensus prevails, and we see an easing of the Fed Funds rate in 2024, NMD portfolio rates may likely end the year flat to slightly lower (-5bps if the Fed eases by 100bp over 12 months). Any progress that institutions can make in lowering time deposit rates may provide further relief on total funding costs.
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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