Data Analysis: Why Are There Still So Many Credit-Only Relationships?

As the spread between deposit rates and wholesale funding rates has widened over the past few years, deposits have become an increasingly lucrative source of financing for commercial banks. With both the Fed Funds rate and LIBOR holding steady near 2.5%, even interest-bearing DDAs can significantly bolster net interest margin (NIM) in the current rate environment. 

Loans, Yes. Deposits … Maybe?

Clearly, winning deposits is an important strategy for most banks, particularly where credit is extended. That said, a surprisingly high volume of credits are originated or renewed without any associated deposits (Figure 1). 

Source: PrecisionLender. Data reflects the percentage of loan outstandings on the books as of May 2019 with associated deposit balances. "Credit-Only" relationships may have had deposit accounts in the past which have been closed as of May 2019.

The incidence of credit-only commercial loans diminishes with size. But even though larger credit relationships are subject to greater scrutiny and oversight, about a quarter of deals over $25 million  are still credit only. On the other end of the spectrum, 70% of loans in the 100-250K lack accompanying deposits. (Figure 2).

Source: PrecisionLender. Data reflects the percentage of loan outstandings on the books as of May 2019 with associated deposit balances, irrespective of the loan origination date. Size of credit relationship reflects aggregate credit exposure.

Is the Promise of Future Deposits an Empty One?

The challenge in winning and maintaining deposits is multi-faceted, but largely stems from a lack of oversight and accountability. Historically, RMs seeking to achieve their production goals without falling below-target on relationship profitability would promise the world to bank management – if we price to win, the deposits and other fee-based business will follow.

Those promises have not always been grounded in a well-defined strategy for attaining the cross-sell, nor an agreement with the customer to move the business over before loan closing. Achieving the ancillary business has been a can that was fairly easy to kick down the road, with few repercussions – if any – for the RM. 

In fairness to the RMs, at some banks the opportunity is passed along to a product partner and may fall off the RM’s radar. 

Until recently, neither RMs nor bank management had the feedback mechanism to track whether the ancillary business ever came to fruition. This is beginning to change, with reporting measuring “Delivery vs. Promise” becoming institutionalized. 

In addition to the challenge banks face in winning deposits, some accounts may be moved but then ultimately closed, which is why it’s essential for banks to revisit relationship profitability on an ongoing basis, not just upon origination. 

Clearly, given the potential financial rewards that come from lowering funding costs, greater attention is still needed, both to attracting new deposits, and to ensuring they eventually arrive on the books. 

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