“Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.” –Groucho Marx
Denizens of the Gonzo world, there isn’t much that is getting talked about more in the planning sessions we attend than the challenges around growing deposits. A quick look at the numbers show how warranted this discussion is:
The industry loan to core deposit ratio was 90% as of 9/30/18. (Note: this ratio eliminates jumbo CDs over $250,000 and brokered deposits, which in my mind makes for a more revealing story.) But that isn’t the whole story. For banks with assets of $1 billion to $250 billion, the ratio is 100%. That’s one zero zero – every deposit dollar is loaned out. One measure of how effective banks over $250 billion have been in grabbing/keeping deposit share is that the ratio for them is 81%. Credit unions are at a somewhat more benign 85%, but that represents an industry high since the recession. As for the top 10 banks, they are liquid going into 2019, and we can assume they will enjoy lower deposit betas than the rest of the industry.
The cost of earning assets increased from .48% to .70% since January 1 for the industry. That’s 22 basis points in nine months.
Online banks are getting aggressive. It takes no time at all to go to bankrate.com or several other sites and see dozens of offers for 2% or higher on a savings account. Sure, it’s new money only and sure, it’s not guaranteed, but the average deposit interest rate overall is .24%. When is the last time we saw a 2% difference between the average savings account rate and the top rate?
Our publicly traded clients have all reported that the analysts are increasingly asking them about their deposit franchise and their ability to organically grow core deposits. Strong deposit franchises are getting analyst recognition.
So, going into 2019 the issue of deposits is real and it’s one of growth, margin and profitability. And this is one that won’t be addressed with any single, big “home run” strategy. It must be hit straight on with a number of focused initiatives that will need to succeed in unison.
Here are some suggestions for 2019 deposits based on what we have been hearing and discussing at Cornerstone Advisors:
The “alter ego” online bank rate play may be a short-term balance sheet play, but it’s not a sustainable long-term strategy. Go to Bankrate or one of the other deposit rate sites and you’ll see pretty aggressive pricing from “X Bank, a Division of Y Bank.” Sure, it will get some deposits in the short term, but virtually everybody reading this has a relationship-driven growth strategy that online rate pricing just doesn’t support. Treat this as the maybe-necessary defensive play for the short term, but not salvation.
Large depositor relationships need to be managed aggressively with clear accountability. It is nice to know that since I started in banking in the paleolithic age there is one thing that has never changed, and that’s the 80/20 rule. Twenty percent of depositors had 80% of deposits then and they still have 80%, if not more. It is time to make large depositor relationship management the #1 goal of your team members responsible for these relationships. It’s time here for visibility and formal reporting.
It’s time to put that business intelligence investment to work. There are any number of analytics-driven deposit campaigns bankers have tried with new BI tools—and it’s time for more. Some examples we have already seen:
Identifying existing markets where a short-term rate play may work (a poor man’s alter-ego bank play)
Identifying customers that will respond to a rate offer from a competitor and pre-empt with your own
Offers to mortgage holders or other borrowers likely to have savings elsewhere, sometimes with a relationship pricing angle
Targeted offers to wealth management customers, with very clear accountability for follow-up
Offers to market niches that may be deposit-rich
Nobody is saying these efforts will be easy or successful right away. They won’t. But this is a perfect example of the need for BI. Time to experiment and learn.
Make BI-driven cross-sell campaigns successful with easy online fulfillment. In 2019, more of our customers are going to want to open accounts online. That’s a fact. Then more will in 2020. This is not the time to miss one opportunity because your online account opening solution is clumsy (or non-existent). I suggest that at the next senior management meeting, you put aside the usual agenda, take an hour, and just open an account online using your current tool (better yet if it could be tied to an offer). Give yourself a grade on how well it’s working, then decide what needs to be improved and fast-track the fix.
Get the operating account and the money market with every new C&I deal and at least some more CRE deals. We have clients who are amazingly successful at self-funding. Others are not. The major difference is simply discipline in the sales process. It’s time to get serious not only about getting the deposit at the time the loan is funded but also making it an easy process for the client to complete. Cash management relationship managers, front and center.
Review current branch compensation plans and make sure that high deposit growth performers are very well rewarded. Everybody has deposit goals and compensation plans that pay for deposit growth. Perhaps 2019 is the time to put some extra money into the pockets of those branch or contact center employees who exceed and out-perform. There has never been a better time to over-pay high deposit performers. Plus, if you compare the cost of this to other deposit initiatives, it is probably one of the most effective ways to spend money.
We are facing a long-term reality that deposit growth will become more difficult. This is not a 2019 issue that will go away at the end of the year. So, the steps you take (these or others) are really setting a new, long-term direction that recognizes the changing nature of deposit sales and relationship management. Let’s get to work.
“He not busy being born is busy dying.” —Bob Dylan, “It’s Alright, Ma”