Anna-Fay Lohn contributed to this report.
Even before headlines reported the recent commercial bank failures, last year's series of interest rate hikes already had bankers focused on growing deposits, protecting the deposits they already have, and stepping up loan loss provisions. In this three-part blog series and accompanying webinar on June 7, we examine Q2 PrecisionLender's proprietary data to reveal stories of what's going right—and what could go wrong—in the chase for deposits.
The decisions bank executives and asset/liability management (ALCO) groups are making today on the value of deposits, the interest rates paid on them, and how much reset (or movement) to apply on those rates are at the forefront of strategic discussions across deposit-gathering institutions.
We dug into our Q2 PrecisionLender portfolio information to help us paint a picture of how financial institutions are managing the high interest rate environment and the current drive toward deposit growth. We found that bank leadership providing strategic guidance to RMs through Q2 PrecisionLender is a key factor in growing liquidity—retaining deposits and net new deposit gathering. In addition, when leaders value liquidity, more balanced relationships are formed—relationship value.
If we consider the Pareto Principle (also known as the 80/20 Rule) that specifies that 80% of consequences come from 20% of the causes, we can assert that the top-performing bankers are driving the majority of deposit growth. And by looking at the activity of those top bankers, we can determine several guiding behaviors for building liquidity.
As we explore the first few financial institutions that have seen their deposit balances maintain or grow, we will focus on these basic concepts:
- Deposit rate paid movement and sensitivity (beta)—Often, FIs posting frequent deposit interest rate paid increases (high beta) are viewed as adopting a chasing-deposit strategy. FIs with lower/fewer interest rate paid increases (low beta) are characterized as preserving overall deposit costs.
- How institution leadership values deposits through the Funds Transfer Pricing (FTP) credit.
- Sources of deposit inflows—For example, we explore the pricing culture in place, strategically, to help grow the balance sheet and provide tools for the best bankers in the deposit space. In addition, we examine where core deposits come from and what is the distribution across banker profiles.
Let’s Level Set
From September 2022 to February 2023, Q2 PrecisionLender clients’ deposit portfolios showed that 40% of the FIs saw an increase in balances, approximately 40% saw a decrease in balances, and the remaining FIs saw no change. Additional segmentation analysis shows approximately 58% of FIs in the Community space and the Enterprise space gaining deposits. The Regional segment showed nearly the inverse frequency, with 61% posting deposit attrition.
Remember that all of these results are prior to any movement in balances as a result of the recent bank failures. We will explore that impact later in this blog series.
Financial Institution Balances, September 2022 to February 2023
Overall, the rate on deposits for Q2 PrecisionLender’s client base has increased nearly 50 bps to 88 bps from September 2022 to February 2023. Meanwhile, the FTP credit rate has increased from 284 bps to 413 bps or plus 129 bps (not shown). The indication here is that deposit rate paid sensitivity (betas) is low relative to changes in deposit valuation. This result begs the question why some financial institutions saw an increase in deposit balances while others saw a decrease.
Deposit Rate Paid Trend
A Picture of Success
We pulled data from some of our top-performing clients to create an amalgamation of what a successful bank might look like in this environment. Do betas drive deposit growth, or is there something more? We found that recent upward movement in deposit rate paid (beta) is not the only driver of deposit availability on the balance sheet. For example, our successful bank displayed a wide range of pricing strategies, where rate paid increased between 40 bps (low beta observation) and 275 bps (high beta observation) with similar results in deposit retention and growth, as well as similar deposit valuation techniques in the form of Funds Transfer Credit Rate.
Even though the successful bank increased betas significantly, not all bankers demonstrated deposit growth during this period. The top 5% of bankers, as defined by deposit balances, contributed 37% of all deposits and have a rate paid below the portfolio average.
The full distribution of relationship managers' deposit balances and their rate paid shows that the top deposit-gathering RMs, on average, actually pay less than the rest of the top 5%. We dug further and found that these deposit-gathering bankers pay less for those deposit books than the remainder of the bankers.
The results indicate that price (here, rate paid) is not the single driver that matters in deposit gathering. Of course, the concentration of non-interest-bearing deposits matters in overall deposit costs. Results also indicate that the top bankers do not necessarily leverage price, and that the most successful deposit gatherers work in a culture that empowers them rather than hinders them.
RM Contribution to Deposits
For bankers with successful deposit-gathering efforts, we followed what happened to the other metrics during this period. We looked at these results from three lenses: the individual banker, as part of a line of business (LOB), and the banker's relationships. Indexing key metrics such as net income, deposit balances, loan balances, and revenue growth to September 2022, we saw not just an increase in deposit balances but an increase in all metrics over this timeframe. Given deposit growth at the LOB level, we found improvement in loan balances, improvement in net income, and growth in the size of the book of business—up 7% in this example.
Relationship Composition Change, Indexed to September 2022 = 100%
Line of Business Change, Indexed to September 2022 = 100%
In addition, we found common themes across these banker groups. At the FI level, we noted observable leadership commitments to a pricing culture through:
- Transparent approval process with multiple performance thresholds (credit, cross-sell, and relationship components, for example)
- Banker empowerment for pricing and approval
- Use of performance measurement tools like value-based incentive compensation and Delivery to Promise, a Q2 PrecisionLender dashboard that provides a visual representation of the actual deposit types and balances tied to relationships flowing over from your core system compared to the deposits that were promised by the borrower
- Integration of pricing workflow into CRM and LOS systems
At the banker level, observable behaviors include:
- Activity growth—building the pricing muscle
- Pipeline management—owning progress of deals through the pipeline and recording final win/loss results
- Embracing of methods for target ROE achievement through complete/deep opportunity composition
As you can see in the below charts, this LOB team continues to build its pricing muscle with increased activity over time and studies the performance of that activity to continue to improve.
LOB Volume Adoption Trend
LOB Trended Adoption Pattern, Selected KPIs
Strategy Is a Key Factor
Our research has revealed two truths: The best bankers do not necessarily price up to attract deposits, and the top deposit-gathering RMs are also the top performers in other measurements. In fact, if a bank's deposit pricing strategy focused solely on rate paid, it may limit the potential of RMs. By studying our successful bank, we find deposit strategy is part of a broader pricing culture that provides leadership commitment, supports banker empowerment, fosters key behaviors, and provides appropriate measurement of outcomes.
Q2 PrecisionLender supports such an environment, giving bankers the ability to build a better brand for themselves and their FI with stronger relationships and expanded profitability.
Get More Insights at Our Upcoming Webinar
Join Q2 PrecisionLender experts on June 7 from 2 to 3 p.m. ET for more insights about the findings from this research.