What's Happening With Commercial Deposits?

August 12, 2019 Gita Thollesson

Gita Thollesson, PrecisionLender's SVP of Market Insights, came on the podcast to share some of the findings from her upcoming webinar on the pursuit of commercial deposits. 


Helpful Links

Commercial Deposits: Market Trends & Opportunities

The Fierce Battle for Deposits: Who's Winning and Why 


Maria Abbe: Hi and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender where we discuss the big topics on the minds of today's best bankers. Today's podcast features Jim Young, director of content for PrecisionLender, and Gita Thollesson, our EVP of client success and market insights.
Gita and Jim will be discussing Gita's upcoming webinar entitled Commercial Deposits: Market Trends and Opportunities. They'll be touching on some of the topics Gita will be covering in the webinar and she'll provide a sneak peek or two into some of her findings. We'll have a registration link for the webinar in the show notes and you can also sign up for it by going to precisionlender.com and clicking on the banner ad at the very top of the screen. But first, enjoy this preview podcast.
Jim Young: Gita, thanks so much for coming on the show.
Gita Thollesson: My pleasure, Jim.
Jim Young: And as Maria mentioned in the intro, this is going to be almost... I like to think of this as sort of like those extended trailers you have for a movie where you get a really good sense of what's in that movie, but you don't get to watch it. So that's what we're going to try to do with this podcast, discussing Gita's upcoming webinar on deposits. So Gita, this is the third webinar you've done this year using market data to take a look at a particular commercial banking issue or trend.
Gita Thollesson: Right.
Jim Young: So first question, why deposits this time?
Gita Thollesson: Well, we have done other sessions focused on the credit side and generally when bankers think about net interest margin or NIM, they often do focus on the revenue component. So in other words, how can we strengthen margins to improve NIM? But there is also a cost component and that is how can you minimize funding costs to improve NIM? And with the gap having widened so much between wholesale and retail funding rates, funding off of deposits has been an even cheaper source of funding, at least on a relative basis, than maybe a year ago.
So deposits are a critical part of the equation of looking at overall NIM and risk adjusted profitability and one that we really haven't investigated up until now. So certainly there's a lot of public information out there on rates and balances for the overall market, but there's really very little out there specifically on the commercial side in terms of commercial deposits and commercial deposit pricing, which as we've learned, is quite a bit different than consumer deposit pricing.
Jim Young: Yeah, absolutely. And just thinking back to the podcast that we did a while back with Tim Shanahan about the push for deposits, it feels like every time I'm opening up an article from a bank publication trying to add deposits and that sort of thing is on the minds of bankers right now.
Gita Thollesson: Absolutely.
Jim Young: So that need seems obvious, but given the emphasis on them, the overall market numbers, some of the ones that you'll be sharing in this webinar, seem to be to me at least to be kind of a little bit depressing. Can you discuss a little, give us a little sense of what you've found there?
Gita Thollesson: Well sure. So in terms of the aggregate commercial banking market, most bankers will know deposit growth has been disappointing at best and there's been some growth, but it's been up and down. It's been very inconsistent. And you know, most bankers have probably seen the market's aggregate deposit figures. But what we were able to do, and what we'll share on this upcoming webinar, is more specific information on commercial deposits. And we gleaned that from the call report data, got a much better read specifically on the commercial space. So that should be pretty interesting.
And we looked at the market composition, we measured shifts between non term deposits and term deposit accounts. And then even within the non term arena, we measured the market shift away from DDA into interest bearing accounts. Clearly the interest bearing accounts are somewhat more restrictive in terms of either the balance requirements or the ability to access the funds, but we're able to sort of measure specifically how much of a shift has occurred and how much banks are paying for commercial deposits.
So you know how much they're paying to attract new clients relative to what they're paying existing clients. So it's a really interesting metric specifically on the commercial space that we really haven't seen before. The other thing that we were able to examine was the importance to customers of yield versus liquidity. So without giving away too much, suffice it to say that we were able to identify what matters most to customers and what it takes to get balances moved over.
Jim Young: Yeah. Again, trying to avoid spoilers in the webinar, I think I feel comfortable... I don't think I'm letting a cat out of the bag here if I say that it's still, while banks are really want to add deposits, they're having a tough time doing it. I feel like that's a safe conclusion.
Gita Thollesson: Yes. That's an understatement. Absolutely.
Jim Young: So what are a few of those factors that you think that are making that difficult?
Gita Thollesson: Well, in the larger end of the market where you've got a lot of syndications and you may have a very large bank group, I mean the ancillary business is going to be spread over some subset of the bank group. So there are lots of banks that may get a piece of the credit but may not share in the deposits or any of the other cross-sell. That's part of it for the larger deals.
Now I'd say another big component is just timing. So deposits are normally part of the operating business that every bank is going after. That includes cash management and sometimes it could take quite a bit of time to move all of that business over. Let's say a rule of thumb might be about six months or so to get that business moved over and a lot can happen during those six months. If you take your foot off the gas pedal and you stop following up with the customer, it's very easy for those six months to turn into a much longer period or maybe that never even comes to fruition. I think that's also exacerbated by a lack of oversight at a lot of banks. Banks where bankers are able to bet on the come, they're able to promise ancillary business that may or may not ever materialize and there's no good way of tracking where things stand and so lots of different things that negatively impact a bank's ability to win those deposits.
Jim Young: I guess for both good and bad, size of the bank that comes into this as well. Can you discuss kind of a few of those situations where, I know when you were looking at the numbers it was, "Okay we found it this way but we also need to make a point about how these numbers mean something slightly different for bigger banks and for smaller ones."
Gita Thollesson: Yeah, absolutely. Certainly deposits are important to banks of all sizes and we see that in the deposit betas. There's been a lot published on that topic in terms of just how much of the rate increases in the market have been shared with customers via higher deposit rates. Banks of all sizes are raising those deposit betas, but where we see the biggest difference really comes down to the regulatory environment. So those largest banks, banks over $250 billion in assets, they tend to have a much higher dependence on wholesale funding and it's essentially that they are subject to higher net stable funding ratio, so they have to match fund more of their assets and that means that even if they were able to win a lot of additional deposits, they really never could truly eliminate their need for wholesale funds because of that requirement to match funds. That's probably where we see the biggest difference. Not so much of a difference in the under $250 range based on bank size, but those larger banks, big, big difference in terms of that dependence on wholesale funding.
Jim Young: Well, again, without giving away too much of this webinar, tell me one thing from your research that you found when you were going through the data that kind of raised your eyebrows, that was a little different from what you were thinking it would be.
Gita Thollesson: I'd say probably the biggest surprise was the magnitude of the premiums that banks pay for liquid commercial deposits because there's a lot of information out there in the public realm on where deposit rates are. So interest bearing deposits, CWI accounts, and so on. And numbers out there by term. When I looked at the commercial deposit pricing numbers, they were so much different than the broader market figures. So that was a real eye-opener. And as well, there was some dynamics there relative to borrower size that were pretty striking in terms of just how much banks are willing to pay to attract larger accounts.
Jim Young: You always end these webinars and then the accompanying reports on a bit of a high note, which I always appreciate because there's a lot of banking numbers these days. You can spin it in a pretty grim way, but you usually on a note with examples of banks that are doing it well or tips for how banks can do it better. And in this case, I know you've culled these ones, the ones you have for attracting deposits, that you've culled them from a lot of interviews you've done with successful bankers out there. Can you share one or two of the to do's that stood out for you or that when you talked to bankers, you heard from multiple sources and thought, "Okay, this is definitely one that hits home."
Gita Thollesson: Absolutely, and there are so many, I mean there are certainly best practices at a bank level and then there are also best practices at an RM level within any individual bank. But some of the themes were things like moving the deposits over prior to loan closing, if that is feasible. Obviously for the reasons I mentioned earlier, that can't always happen if it's part of the operating business. But if that's the case, agreeing to a clearly defined timeline. And then equally important to that is being tenacious about following up. One banker recently told me that even if there is an agreement with the customer, if they don't hear from you, if you go radio silent on them, they're going to assume that the deposits really weren't that important to begin with and then you're just never going to achieve that business. So the followup is really critical.
I mean, it's common sense, but it's something that a lot of folks just don't do. I'd say maybe another important one, and I wouldn't say it's market wide, but it is important, is when you're spreading the financials, you're doing the credit analysis, use that liquidity data to size the total pipeline and then actively manage that pipeline. I personally just recently refinanced a mortgage and most of my deposits are with other banks, not the bank that I'm refinancing with. And even when they got that information, they never explored whether I could move any of those balances over to their bank. They never even asked. So it's really about identifying the total pipeline and then just asking, "What would it take to move these balances over? What are you getting today and what would it take to move them over?" And it's certainly something that a lot of banks just don't do on the commercial side.
Jim Young: I'm glad you mentioned that because I often tend to think of these things as my own retail experience is totally different from it, but I thought as soon as you said that I'm like, "You know what? You're right. I've got my mortgage with a completely different bank." They've never asked me...
Gita Thollesson: Exactly. Yeah, the left hand is not talking to the right.
Jim Young: Yeah, absolutely. All right, well that will do it for this week's show. Again, if you want to hear more from Gita about trends and opportunities with commercial deposits, be sure to sign up for her webinar. It's going to be this Thursday, August 15th at 2:00 PM Eastern. There'll be a link to it, to the signup page in the show notes, which you can always find at explore.precisionlender.com. And you can also sign up by clicking on the banner ad at the top of precisionlender.com. Gita, thanks so much for coming on the show.
Gita Thollesson: My pleasure, Jim.
Jim Young: And finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google Play, or Stitcher, and we love to get ratings and feedback on any of those platforms. Until next time, this has been Jim Young, Gita Thollesson, and you've been listening to The Purposeful Banker.
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