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This Month In Commercial Banking | February 2021

The February issue of  “This Month in Commercial Monthly” begins by examining the divergence in deposit growth rates, which has led to an overall shift of four percentage points of market share from the largest banks to regionals and smaller banks through the second half of 2020. Next, we double-click on the ongoing pandemic’s impact on TM fees, which remain one of the few profitability levers available for banks to pull in this environment. Finally, we analyze the publicly-reported commercial LOB results from Q420 and set out the execution agenda for 2021.

RATES AND GROWTH

Continued Divergence at End of 2020

Data from our latest full CDA Executive Summary report show continued wide variance in deposit pricing. December MMDA portfolio rates ranged from 37 bp for the top quartile of rate payers to 4 bp for the bottom quartile. We see a similar pattern in IB DDA, where the top quartile of portfolio rates paid an average 32 bp while the bottom quartile paid 5 bp on average. (See Figure 1.)

Figure 1: IB DDA and MMDA Portfolio Rates

IB DDA Avg. Portfolio Rate
Middle Market Segment: December 2020

MMDA Avg. Portfolio Rate
Middle Market Segment: December 2020

Source: Novantas Comparative Deposit Analytics
Note: Quartiles represent populations of distinct banks split evenly from lowest to highest rates. Average is calculated as the simple average of the entire population.

ECR portfolio rates averaged 27 bp in December, but ranged from 44 bp in the top quartile to 10 bp in the bottom quartile on a nominal basis. Net of deposit administration fees (DAF) – typically 12-18 bp  – effective portfolio ECRs were an average of 13 bp with the top quartile of portfolios paying 29 bp and the bottom quartile at 2 bp. (See Figure 2.)

Figure 2: Nominal ECR vs. ECR Net of DAF

Middle Market Segment – Avg. Portfolio Rates: December 2020

Source: Novantas Comparative Deposit Analytics
Note: DAF refers to the Deposit Administration Fee – fee that banks assess to cover deposit insurance costs.

Commercial deposit balances were up nearly 30% year-over-year in aggregate at the end of 2020, but there was significant variance on this front as well. (See Figure 3.) On a percentage basis, balances at smaller banks grew much faster than the largest banks. (See Figure 4.) In the early stages of this surge, we attributed this largely to the depths of primacy within individual banks as corporates concentrated liquidity in their primary operating account and looked most often to their primary bank to access PPP loans. Other factors came into play in the second half of the year, including how aggressively different banks sought to discourage incremental surge balances. Pricing likely played some role on the margins as well.

Figure 3: Commercial Deposit Growth

2Q19 to 4Q20

Source: Novantas Comparative Deposit Analytics, SEC Filings

Figure 4: Year-Over-Year Deposit Growth by Bank Size

Top 6
Regionals
Under $50B

Source: Novantas Comparative Deposit Analytics, SEC filings

Figure 5: Share of Total Deposit Market

Under $50B
Regionals
Top 6

Source: Novantas Comparative Deposit Analytics, SEC filings

This divergence in growth rates led to an overall shift of four percentage points of market share from the largest banks to regionals and smaller banks through the second half of 2020. (See Figure 5.)

As banks manage through this challenging and unprecedented environment, we continue to recommend focus on four key priorities for 2021: managing rates down, getting a handle on the surge via client level multi-scenario forecasting, deepening relationship primacy and building/updating customer scoring models and segmentation.

Pandemic Cuts Into Some Treasury Management Fees, Boosts Others

The COVID-19 pandemic had a mixed impact on treasury management fees in 2020, with a steep decline in lockbox volumes being partly offset by the increased electronic payments fees and higher deposit assessment fees (DAF), according to a Novantas examination of NDepth account analysis data.

Looking ahead, banks should prepare for a potential decline in DAF later in 2021 if the current deposit surge starts to ease.

It’s been nearly a year since COVID-19 began affecting businesses around the country, but most analysis about commercial banking has been focused on the implications for deposits, credit and loan demand. Now, however, the impact on treasury management fees is becoming apparent.

To better understand how the pandemic has impacted treasury management behavior, we observed the annual spend of 2019 and 2020 from a cohort of randomly-selected corporates using our NDepth Bank Fee Service. (See Figure 6.)

Figure 6: Companies by Change in TM Spend

(FY 2019 vs. FY 2020)

More than 20% Increase
5-20% Increase
Less than 5% Increase
Less than 5% Decrease
5-20% Decrease
More than 20% Decrease

Source: NDepth

Within this cohort, 61% saw some level of decrease in their FY 2020 total TM spend compared with 2019, with an average drop of 12%. A majority of the corporates that experienced a decrease saw a moderate decline between 5% and 20%. On the other hand, 39% of the sample paid more in fees with an average 8% increase. There was no observed correlation with industry vertical.

Among those that experienced a decrease in spend in 2020, lockbox was the biggest driver for 40%. (See Figure 7.) Meanwhile, electronic payments/ACH emerged as one of the top positive drivers for spend increasers. (See Figure 8.) Additional analysis showed that lockbox spend decreases were mostly driven by decreases in volume, while electronic payment/ACH spend increases were largely driven by higher prices.

Figure 7: Fee Decrease Drivers

Top Drivers for Fee Decreases

Lockbox Decreases: Price vs. Volume

Price Driven
Volume Driven

Source: NDepth

Figure 8: Fee Increase Drivers

Top Drivers for Fee Increases

Electronic Pymt. Increases: Price vs. Volume

Price Driven
Volume Driven

Source: NDepth

Figure 7: Fee Decrease Drivers

Top Drivers for Fee Decreases

Lockbox Decreases: Price vs. Volume

Price Driven
Volume Driven

Source: NDepth

Figure 8: Fee Increase Drivers

Top Drivers for Fee Increases

Electronic Pymt. Increases: Price vs. Volume

Price Driven
Volume Driven

Source: NDepth

The DAF was one of the largest drivers for increased spend amid a surge in balances. More than 60% of all corporates increased DAF, with an average rise of 71%, mostly driven by balance changes. On the other hand, DAF decreases were driven by lower volumes, price decreases or both. (See Figure 9.)

Figure 9: DAF

Companies by DAF Growth

DAF Increase Drivers

DAF Decrease Drivers

Price Driven
Volume Driven
Mixed Driven
Price Driven
Volume Driven
Mixed Driven

Source: NDepth

Figure 9: DAF

Companies by DAF Growth

DAF Increase Drivers

Price Driven
Volume Driven
Mixed Driven

DAF Decrease Drivers

Price Driven
Volume Driven
Mixed Driven

Source: NDepth

Commercial banks should be ready to respond to potential changes in treasury management fees this year as businesses slowly recover from the impact of COVID-19. While lockbox volumes are likely to recover and the pricing gains in electronic payments will likely stick, changes in DAF may be a risk for which banks haven’t yet prepared. Most banks are anticipating (and encouraging) a run-off in deposit balances, especially in specific segments, but they may not have sized and prepared for the impact on DAF.

To get ahead, commercial banks would be wise to run a fee risk analysis from the potential DAF changes and look for other areas of growth that could help offset that lost fee revenue.

Scott Musial (smusial@novantas.com), Quincy Meng (qmeng@novantas.com)

Execution Will Be Key for Commercial LOBs Amid 2021 Headwinds

As we put 2020 behind us, there is clearly light at the end of the tunnel. The beginning of the new year has seen positive news related to the pandemic as infections, hospitalizations and deaths have dropped dramatically. In addition, vaccine production is on the rise and vaccinations have accelerated dramatically in the last several weeks. The Conference Board predicts economic growth of 4% this year after contracting 3.5% in 2020. At the same time, the Organisation for Economic Co-operation and Development (OECD) reports that consumer confidence has continued its seven-month rise since reaching a 10-year low last May.

There also are several bright spots from commercial line of business results in the fourth quarter. Profitability continues to improve from steep declines in the first half of 2020. (See Figure 10.) Revenue growth was positive for many banks. Credit quality continues to be better than expected, prompting many banks to release reserves.

Figure 10: Q420 Revenue and Net Income Growth (YOY)

Median Revenue Growth
Median Net Income Growth

Source: Quarterly Earnings Reports for BAC (GM, GB), COF, C, CFG, CMA, FITB,  JPM, (C&IB, CML), KEY,  PNC,  USB, WFGO (CIB, CML)

That said, significant headwinds exist, and many commercial bankers are uncertain about 2021 performance. First, economic growth isn’t assured. Logistical challenges remain to getting most of the population vaccinated (the key driver to improvements in unemployment/opening the economy). Many key industry segments, especially sectors like hospitality, entertainment and retail will continue to lag. Finally, we have seen net interest income get crushed because commercial deposits have soared roughly 30% from year-ago levels and loan growth is flat. (See Figure 11.) Furthermore, the outlook for loan growth will likely stay cloudy as long as company balance sheets are awash in liquidity.

Figure 11: Q420 Commercial Loan & Deposit Growth (YOY)

Loans
Deposits

Source: Quarterly Earnings Reports

Novantas believes that commercial LOBs must drive execution in three areas in order to see success in 2021:

  • Make customer primacy the center of the LOB’s strategy/actions. This effort extends from acquiring primary clients from the get-go to evaluating the current portfolio to shift non-primary clients to become primary customers through targeted cross-sell. But primacy is not binary and not all non-primary customers are ripe for cross-sell. Therefore, increased diligence around targeting, measuring and accountability tracking are required to spur performance. For many banks, this will require better analytics, more frequent meetings with specific clients and communication from leadership that reinforces the importance of these efforts.
  • Sharpen the pencil related to customer profitability. Given that deposits, a traditional driver of commercial customer profitability, are barely break-even, it is very important to leverage the best tool available to improving customer profitability – pricing. Ensure the bank has constructed the optimal value exchange with its clients, and if not, make the tough decision to exit low-value relationships.
  • Execute on the treasury management investment roadmap. Nearly every bank in our coverage has planned short-term and long-term TM investments. The myriad uncertainties and budget pressure would make it very easy to pull back on these investments. That would be a critical mistake and only exacerbate future challenges as the bank falls further behind in its capabilities. Nothing is more important to securing the primary relationship and driving fee income than competitive operating services.

Now is the time to exercise strong management discipline to navigate through this uncertain period.

Mike Rice (mrice@novantas.com)
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