(Note: This blog post was originally written in July 2023, as we sought to understand shift in the commercial market in the wake of the deposits crisis in the spring of the year. Though the data is a year old, the conclusions have not changed.)
Given how tumultuous 2023 has been for the banking industry, we decided not to wait until January 2024 to release our next State of Commercial Banking report. Instead we decided to take stock of things now, with a mid-year update.
Before we share one of the more interesting findings from our research, a quick reminder: the data in this blog post, and in the State of Commercial Banking webinar and report, is pulled primarily from Q2’s proprietary databases. The Q2|PrecisionLender databases reflects actual commercial relationships (loans, deposits, and other fee-based business) from more than 150 banks and credit unions in the United States, ranging in size from small community banks to top 10 U.S. institutions. In addition to the actual relationship data, we gleaned insights from RM pricing activity on the Q2|PrecisionLender platform.
The Shift from NIM to NII
As part of our analysis, we looked at the factors that came together to put an end to the previous positive correlation between rising rates and NIM.
Net Interest Margin Trends
Bankers took a look at the rising costs associated with commercial lending, and made the logical pivot, shifting their focus to bringing in more non-interest income.
Shift to Non-Interest Income
Treasury Management Powers Relationship ROE
The data in those FDIC charts highlighted a trend we’d already suspected, confirming what we’d heard anecdotally during our daily conversations with bankers throughout the United States.
It’s hardly a surprise that banks are putting increased emphasis on cross-selling. Irrespective of the rate environment, relationships with ancillary business produce measurably stronger yields than those without.
But then we delved into the Precisionlender Commercial Pricing Database, to get a measure of how big that cross-sell impact is, and what’s driving it. That’s when we found something that caused us to raise our eyebrows.
In the first half of 2023, with NIM still relatively high, credit-only relationships gave a solid 13.4% ROE. The ROE rose by nearly 40% (to 18.9%) when relationships also included deposits.
But take a look at what happens when the relationship includes treasury management (TM).
Treasury Management Impact
The ROE on those relationships (both those that include a credit element and those that are only deposits & TM) averaged 39.2%!
Learn More
The shift toward non-interest income, and the outsized ROE impact of Treasury Management were just a few of the interesting findings that surfaced during our dive into commercial banking data from the first half of 2023. To learn more, watch our on-demand webinar, The State of Commercial Banking: 2023 Mid-Year Update.
