In this week's episode, Alex Habet and "Deal Doctor" Tony Hernandez talk about the importance of commercial deposits in the current market environment and discuss ways to both obtain them and protect them.
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[Webinar Replay] State of Commercial Banking January 2023 Market Analysis
[Report] State of Commercial Banking January 2023 Market Analysis
Transcript
Alex Habet
Hi, and welcome to the Purposeful Banker, the leading commercial banking podcast, brought to you by Q2 PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Alex Habet.
So today we're going to dedicate the entire episode to deposits. I'm just going to get out right from the gate and mention that. It's not something we do very often here on the show, but it might be a little bit normalized, at least during this period now, because without a doubt, there's been almost a generational shift in focus in deposits recently.
There's been a lot of action in the news. So with the Fed's stated objective to cool down economic activity by raising costs, specifically on the credit side we're talking, we're entering a new phase for the knock-on effects that we're going to start to observe more broadly in the economy.
By mid-2022, we started seeing deposit rates take up meaningfully, but it started initially as a concern mainly for niche players, right? Think of banks that cater to tech companies or other specific verticals or cryptocurrencies. But in the ensuing months, there's been a spread more broadly in the industry. And we're observing an acceleration of usage and excess deposits that were shored up during the height of the pandemic. They're finally being spent in the wake of higher credit costs.
We're also seeing a lot of wealthy depositors now getting a lot savvier when moving their cash between institutions in search of profit. For example, through brokered CDs, which is an observation that was also confirmed by a close friend of mine at one of the country's biggest brokerages. In the State of Commercial Banking report, which was recently published, it was confirmed that while loan demand is softening, it's still outpacing deposit growth, which makes banks' urgency to retain the deposits that much greater.
So to help with thinking through all of this, I'm excited to welcome back to the show the Deal Doctor, Tony Hernandez, who moderated the Q2 State of Commercial Banking webinar a couple of weeks back. We all know how much people out there love the good doctor, so Doc, welcome back to the show.
Tony Hernandez
Thanks, Alex. Always a pleasure being here. Let me tell you, being part of the State of Commercial Banking was a real treat. I think that, for me, that's probably as close as I'll ever get do being on live TV. And Gita and Debbie—true professionals. And the whole team that ran the programming made it something really special. So happy to have partaken on that rather.
Alex Habet
How was the experience for you just generally moderating that session?
Tony Hernandez
Yeah, so not going to lie, I was quite nervous lead leading up to it. But again, given Gita's and Debbie's expertise and the whole team of them running a tight ship made it, getting on and just having that production go live ... By the time we went live, I was cool, collected, and really, again, enjoyed the moment. I've attributed it to being as the closest thing as I'll get to being on live TV. So it was really, really cool.
Alex Habet
I seem to recall, though, that there weren't any Deal Doctor references on that webinar, which was a little disappointing, but it's OK. There's going to be plenty of them here on this show. I've just got to make sure that people know who they're listening to.
Tony Hernandez
Well, as part of my contract, the head broker, I put that I was going to get first dibs at asking questions. As you can imagine, State of Commercial Banking, lots of good content. I had a lot of questions myself, but, given the amount of content and the amount of time that we had, I did not get a chance to ask that question on there. But we'll get that out in this episode today, Alex.
Alex Habet
So look, I wanted to start our conversation today ... Again, we're going to stick mostly to deposits here, but I wanted to start with actually an important point that was made during that session that you moderated in addition to the report that went out. And it's the point that NIM has made a dramatic comeback from recent years where it's been pretty low.
So this means that risk-adjusted returns are up, but that could be short-lived as funding costs start putting pressure to bring NIM back down to earth. So we're dedicating an episode to deposits, and the first point I'm making here is about credit returns. But really, it's about the crunch of the income on the net interest income that could be happening because of these deposits.
So look, it's been a while since you've been on the show. It's been a few episodes, not too long. But I'm curious, just more recently, are you having these kinds of conversations or is this topic coming up in your daily routine with the institutions that you cover as part of your day job?
Tony Hernandez
Yeah, and I don't think that, not as direct over we're just bluntly speaking on deposits, but more about that broader strategy. And not only from the clients that I interact with, but that our peers also work with. I think that you see the gamut of banks coming up and either talking about shoring up what their broader strategy is going to be—not only for deposits, that's definitely a large part of it—but what are they going to do in terms of, or what's going to be their relationship play when it comes to deposits?
I think on one end, or one side of this bookend, is going to be that you stay course and really lean into the value proposition of your bankers and what you as an institution offer. And to the other end of that bookend, being there might be a play for us to get some of those deposits by offering higher paying CDs to attract those deposits.
For me at least, hard to pin down exactly what's the right thing for any individual banker, for any individual strategist or bank given their unique circumstances. Where were they before we even got here? What is their overall growth strategy, etc. But somewhere in between there, I think that the banks are starting to communicate those mandates or are already well on their way in executing against them.
Alex Habet
Well, so let's zero in then a little bit, focusing first on defending deposits. Think of deposits that are already in your portfolio. How would you coach someone to do that best? What are the good tactics that you would recommend? Do you double down on monitoring activity? Do you leverage tools like anomaly detection to see if there's any foreshadowing event of an outflow? What's your reaction? How would you coach them?
Tony Hernandez
Yeah, I think for starters, is just knowledge is power, so knowing exactly where we are with any particular client. You mentioned anomaly detection, which is something that our clients can tap into with PrecisionLender. But more broadly, what are some of the tools that can let us know when either there has been a flight from our deposits or just having, again, debt-enhanced monitoring activities so that we can keep a pulse from what's happening not only at a portfolio level, but also at the client level. So awareness to summarize that point, is just knowing what's going on.
And then second, also being proactive. When was the last time you talked to a client? Is that something that's important to them, to your client? And just having a feel for what your client might want to do. So with that, having the understanding of what might be top of mind for the client, it might be time to do an account analysis, particularly if they're holding onto non-interest-bearing deposits that might be offsetting some other fees at the bank. What is the opportunity cost of gaining 1% in a deposit rate versus what do they stand to lose if they move those deposits from non-interest bearing to interest bearing?
So I think that, again, monitoring. Be aware of what your client's positions might be and what type of relationship they have with your institution so that when that conversation comes up, you're a lot more prepared to deliver value and again, lean into that relationship play. What is the value proposition that not only your institution might offer, but you as the banker, what is it that differentiates you from perhaps your peers and from your peers at other organizations? Right. Sorry, go ahead.
Alex Habet
Let's talk a little bit on something you just kind of opened up a moment ago about the non-interest-bearing versus the interest-bearing type accounts. Not all deposits or deposit types are under pressure these days. This actually feels kind of like a little bit of a throwback to business school. I mean, I don't remember ever focusing on the nuances between time deposits and non-interest-bearing deposits like I did back in the day in textbook, but now here we are.
Time deposits, of course, they're having their moment. For obvious reasons they're paying better now for the buyers. It's, of course, going to attract greater costs of the bank just for obvious reasons. But given the rises in deposit rates, particularly in CDs and other time deposits, should banks be thinking about incentive strategies that really bifurcate between interest-bearing versus non-interest-bearing?
What I mean by that is would you advise a bank to say, "Hey, maybe think about an incentive program for your bankers that heavily pays out more for a non-interest-bearing deposit attraction versus maybe not paying as much for bringing in time deposits," which is still better than having deposit outflows, but not so great that it costs more. What's your reaction to that?
Tony Hernandez
What a layered question you have asked here, Alex. I'm not sure if you realize, but it's quite deep, at least I think it's quite deep. I think the answer is: It depends. I think we open by me saying that your institution might already be in a place where they know their strategy. They've communicated to you exactly what their strategy is, whether that is, hey, we want that type of deposit, or we're going to stay the course.
And if the client wants to go after higher interest-bearing deposits, they're going to do that regardless of what we do. So the short and perhaps unsatisfactory answer is it depends. But if they do, and if their strategy is to get those deposits, then I think it does make sense to incentivize your workforce as it provides some motivation for why do that.
But I think that it's not just having the incentive piece, but also the education that comes along with it. Is all of your workforce, is every banker equipped to have those conversations and be able to bring value and articulate, OK, we stand to gain some of this from earning some money from the higher rates?
But again, if we're moving those from non-interest-bearing deposits that are offsetting some cost perhaps within the bank, what is the cost to that? Because it might be a shortsighted decision based on headlines and all the buzz that's going on around in the world, but in reality, they tend to lose more because now they have more fees to pay from transactional services, for example.
So I think that it can be a good motivator, but just as always, it's always communicate effectively on the strategy, the direction that the bank wants to go, and educate and train the workforce so that they're able to then execute on that strategy.
Alex Habet
Makes total sense. So I'm going to throw another lever to consider in this mix. So how about the notion of de-incentivizing transactions that don't include deposits, meaning credit-only deals? And keeping them, for example, at their prescribed targets, meaning no discounting under any circumstances, no excuses anymore. In exchange for, if you do include, if there is deposit included in the package, then that opens the door for discounting or at least decreasing the targets to meet any approval requirements.
It's kind of a very basic plain vanilla approach to relationship pricing here, but we'd be remiss not to actually just put it on the table as another tool to be used, if appropriate, for the bank. What are your thoughts on that?
Tony Hernandez
Yeah, it's a great question because it can be quite an effective lever. I think in times past, I might have called it friction. How much friction do you want to introduce to your pricing process? I think if you're an institution where that loan-to-deposit ratio is getting to uncomfortable levels, definitely this is very effective in kind of curtailing that flow so that as you're growing your loan portfolio, you're also at least keeping pace with the deposit so that you don't have further slippage.
If you're an institution where that's not the case, perhaps this is not the right strategy. But if this is something that gets deployed, and again, bringing up friction, I just want people to be mindful of how much exception approval this is going to raise. If you're seeing, call it on the course of a week, five deals that are elevated for exceptional approval, does that turn to 10? Does that turn to 15? And what does that then take away from? Because there's a lot of other things that we're executing again.
So one, being mindful of how much friction we're introducing by requiring more eyes on any particular deal. And the second piece being how much volume are we going to do away by bankers just self-selecting out, by not even bringing that deal to begin with, shutting it down before even it could really get going. So I think it's a careful balance of can it be effective? Absolutely, but it's something that has to be, in my mind, done very judiciously. And once we get at desired outcome, start to wind that back, so that kind of the ebb and flow of these things.
Alex Habet
Sure, sure. Well look, one thing's for sure, now is certainly not a great time to lose any deals to competitors, especially where you are at the incumbent bank. So I'm taking one more pivot here around the notion. Well, to be honest, it's never really a good time to lose deals too, especially for your existing clients.
But obviously if you lose now, there's the likelihood of deposits also walking out the door, catapults. So be ready. This requires give and take. This requires the banks to, as you mentioned a few times I think already on this episode, communicate the strategy out. Because the strategy might be, hey, it's OK for these deposits to walk out there. Maybe there wasn't the right fit for the client. Maybe we're doing OK on our base and we can take some or we can afford to lose a bit. But other banks, they might not have as much wiggle room there. So it's really ...
Tony Hernandez
Tight.
Alex Habet
I mean, I think you would agree, right? Try not to lose your deals at least. That's probably one of the easier things you can do. The easier ...
Tony Hernandez
That is not a very Deal Doctor thing to do, Alex. The Deal Doctor does not recommend losing deals.
Alex Habet
Yes. You'd be like the doctor on "The Simpsons," I guess if that were the case.
Tony Hernandez
Dr. Nick.
Alex Habet
Dr. Nick, yes. I think this is the second time Dr. Nick was mentioned on this podcast. But anyway, we know you're the good doctor. People love the Deal Doctor. That's why they tune in.
Tony, look, I wanted to thank you again for coming back today. I know this is kind of a big hairy topic these days. Unfortunately, there's no silver bullet answer for everyone otherwise ...
Tony Hernandez
That's right.
Alex Habet
... it would just be deployed at scale. But look, it is a good time to just dust off some playbooks that still work in this scenario, but to think creatively on some other ones. Any kind of parting remarks that you would have for this audience as they try to grapple with this notion?
Tony Hernandez
Yeah. I really like one of the initial questions and comments that you made about the monitoring piece, and that's for the existing clients. But I think it's just as important to take a look at relationships that we might have won in the course of 2022. I think in one of the previous episodes we talked about having options perhaps as part of that ongoing negotiation of onboarding alone. We were going to bring some of those deposits over. So let's follow through on that promise and make sure that we're closing the loop on that, bringing those deposits over that might have been promised, and revisit that conversation.
Ensure that the client is showing partnership, that they're still in alignment with what their initial goals were sometime last year. If anything, it's a client engagement. It gets you back in front of your clients. Well, 2022, well, it feels like it was just yesterday, can seem like a distant memory. What has changed? And again, getting that alignment with your client again and ensure that the partnership, the relationship that you're building continues. And again, bringing those deposits or other relationship goodies are there that we're talking about bringing this over and when that's going to happen. And overall, look to have a positive client experience because to me, I think that's what it's all about.
Alex Habet
Yeah, I mean, that's actually a really great suggestion for everyone out there. I mean, use this as an opportunity to engage if you're feeling a little light on engagements with your clients. Hopefully that's not the case, but if it is, this is a great segue to talk to your clients about ... Whether it has to do with deposits or not, take advantage of these times as well.
Tony Hernandez
Certainly.
Alex Habet
Well, Doc, thank you for putting on your stethoscope and helping us diagnose and cure the problems out there. Anything else you'd like to plug before we conclude today's episode?
Tony Hernandez
No. I mean, other than follow us on LinkedIn. I know that outside of The Purposeful Banker podcast, Q2 does a good job of tailoring ... or what's it called? Not tailoring, but bringing a lot of good information. Whether it's on commercial banking, digital banking, etc., there is a lot of good stuff on LinkedIn from Q2. So I would encourage everyone to follow us on there.
Alex Habet
Yeah, without a doubt. Check out Q2 on LinkedIn for a lot of great content coming out almost daily, which is pretty awesome. Really interesting stuff out there. All right, Doc, we'll catch you next time. Appreciate it again. See ya.
Tony Hernandez
Thanks Alex.
Alex Habet
So that's it for this week's episode of The Purposeful Banker. If you want to catch more episodes, please subscribe to the show wherever you like to listen to podcasts, including Apple, Spotify, Stitcher, and iHeartRadio. And if you have a minute to spare, let us know what you think in the comments. You can also head over to Q2.com to learn more about the company behind the content. Until next time, this is Alex Habet, and you've been listening to The Purposeful Banker.
