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This Month In Commercial Banking | May 2021

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With the economy increasingly reopening, the theme of the May issue of This Month in Commercial Banking is optimism.

We begin with a review of the positive surprises coming out of first-quarter earnings reports for the commercial line of business; they showed positive trends for the quarter and conveyed a clear consensus that loan growth should start to pick up later in the year.

Second, we break down the trends in the ongoing consolidation within the treasury management space and chart a path for relevance for smaller banks that want to chip away at the larger bank TM advantage.

Third, we share some insights from our recent State of the Treasury Profession survey, highlighting the areas that are at the top of the list of corporation’s treasury departments. As usual, improving cash forecasting is #1 on the list and we continue to see banks as very well-positioned to deliver better solutions to their clients in this area.

Finally, we present the latest findings on deposit rates coming out of the Novantas CDA Executive Summary, which show that there are still a few basis points to squeeze out of the system.

As we look forward to the summer months, we are optimistic that the headlines in commercial banking will increasingly be about TM and loan growth, and perhaps even some draining of excess middle market deposits.

Q1 Commercial LOB Performance: A Surprising Quarter

The trend of the past several quarters of improving performance continued into 2021. Revenue growth improved and net income jumped due to significant reserve releases.

With that as the backdrop, here is a deeper dive into the lines of business:

Macroeconomic uncertainty:
While there is consensus that there is light at the end of the tunnel, the question remains just how fast and how strong the economic recovery will be. Will that lead to an increased level of investment by corporations and spending by consumers, driving an improved employment picture?  Finally, there are differing views regarding inflation and the direction of interest rates (i.e., is current inflation transitory?).

Surprisingly good credit quality:
It wasn’t only good in the comparative sense, but it was good historically! Massive amounts of government intervention have provided the support many companies needed. Banks took advantage of the environment to release significant levels of reserves. The big four national banks released a whopping $4 billion of reserves, driving net income up by 361% and accounting for up to 50% of net income. (See Figure 1.)

Figure 1: 1Q21 Reserve Release as Percentage of Net Income

Big 4 National Banks

Large Regionals (incl. LOB of the Nationals)

Big 4 National Banks

Large Regionals (incl. LOB of the Nationals)

Source: Quarterly Earnings Reports
Note: BAC GM has small release ($5M); CFG added to Provisions

Deposits continue their march to higher levels:
Deposits keep growing even though many banks say they don’t want them and others are starting to charge for excess deposits (generally by allowing deposit administrative fees to migrate higher than ECR). The median year-over-year deposit growth was 31%, raising flags about customer profitability. (See Figure 2.)

Figure 2: 1Q21 Commercial Deposit & Loan Growth (YoY)

Big 4 National Banks

Large Regionals (incl. LOB of the Nationals)

Big 4 National Banks

Large Regionals (incl. LOB of the Nationals)

Source: Quarterly Earnings Reports

High hopes for second half recovery in loan growth:
Though the level of optimism varied among the banks, all expressed a view that the second half of 2021 would see improved loan growth. The primary headwind will be the massive amount of liquidity that sits on company’s balance sheets. This quarter’s deposit growth wasn’t an anomaly; deposits rose substantially last year as well. Even with companies behaving more conservatively and holding onto more cash versus historical practices, the predicted loan growth in the second half of 2021 seems tenuous at best.

We see immediate opportunities to address the current environment:

  • Manage the surge deposits proactively: We don’t see many bank lending through the surge, so it is wise to regularly review deposit pricing and implement negative rates/fees for non-core deposits. Use customer primacy logic to guide these pricing decisions.
  • Reduce the cost to serve: Review the current customer segmentation models and ensure clients are “right-channeled.” Invest in virtual sales capabilities and marketing automation to increase customer engagement and sales.
  • Deploy advanced pricing techniques: Ensure current TM and loan pricing methodologies leverage market benchmarks, advanced pricing techniques like elasticity/willingness to pay/switching modeling. It is also important to structure the right customer negotiation process (including support tools, metrics and governance) to improve price realization.
  • Build out the analytics infrastructure: Continue to invest in the data and analytics infrastructure by developing additional use cases and identifying third-party data sources and partners. Regularly mine internal data sources (e.g., loan accounting platform, transaction data) to enhance customer insights for both internal and external applications. Finally, ensure data and insights are easily accessible to key constituencies with a focus on the “last mile” (i.e., integrating into the day-to-day processes of the front line).

The environment will remain challenging, but banks that implement the above actions will have a greater chance to succeed in the coming quarters.

How Smaller Banks Can Compete Against the Giants in TM

The Great Recession accelerated the decades-long consolidation that had already been occurring among treasury management providers, with M&A initiated due to distress and/or at the behest of the government. As larger institutions merged or acquired similar-sized institutions, the market began to look like an oligopoly. This dynamic was magnified in treasury management due to the capital and sophistication required to be a major player.

Treasury management is now mostly concentrated among a small group of very large providers that have the reputation, presence and, most importantly, resources to effectively defend and grow their businesses. Tier 1 banks on average generate over $4 billion in treasury management fees annually across the globe. (See Figure 3.) This is more than seven times larger than the average fees generated by Tier 2 banks. Tier 2 banks, meanwhile, are three times larger than Tier 3 banks and ten times larger than Tier 4 banks.

Figure 3: Average Annual Gross TM Fees by Bank Tier ($ Mlns)

Source: Novantas estimates and analysis using CDA Executive Summary and publicly available financial reporting
Note: Tier 1 – Annual Gross TM Fees of $1B+; Tier 2 – Annual Gross TM Fees of $300M – $1B; Tier 3 – Annual Gross TM Fees of $100M – $300M; Tier 4 – Annual Gross TM Fees of <$100M

The big question, then, is how can banks compete against other businesses that are three times or twenty times larger and have outsized budgets to match?

Banks must first be able to pursue and deploy the investment dollars that are available to advance the business. Novantas is currently surveying treasury management executives about their investments and so far has found that most are frustrated about the process to secure funding and then implement their needs. We believe that commercial lines of business have an opportunity to better articulate the value of treasury management to the bank and the intense competitive pressures that create urgency for investing in the business.

The second step to compete more effectively with much larger institutions is specialization and scope expansion. Smaller banks don’t have to navigate the organizational overhead in order to specialize and can innovate where they pick and choose. We have seen this specialization succeed even in segments like healthcare where large institutions have invested heavily. Innovating to expand beyond the traditional scope of treasury would also put banks in spaces where they don’t have to compete with the larger players.

Competing against the dominant players in an oligopoly is difficult, but not impossible. Smaller banks can complete and innovate in treasury management if they specialize and more aggressively seek investment dollars that can deliver a strong return.

Scott Musial (

Corporates to Banks: Help Us with Decision Optimization and Fraud

Treasury Strategies, a division of Novantas, recently completed its 15th annual State of the Treasury Profession survey which gathers insights from treasurers at more than 30 Fortune 500 companies. Combining quantitative survey data and extensive interviews, this study provides a uniquely rounded perspective on the challenges and priorities that are top of mind for treasury professionals. Banks can and should be integral to addressing these challenges and so today, we are sharing these insights to help banks plan and prioritize client-centric product developments.

2020 was a year like no other, and  banks and corporates alike pivoted to enhance digital capabilities, moving away from paper in payments and receivables to e-signature. Treasurers expect those changes to be permanent. Most banks were able to adapt during 2020, but any with remaining gaps in core digital offerings should act with a sense of urgency to address them.

Cash insights and decision management remained the top priority for treasurers. (See Figure 4.) Cash forecasting improvements was the #1 priority and has retained this #1 or #2 spot for the last several years. Cash forecasting and liquidity/working capital management are really part of the same process that starts with data aggregation, integrates decision intelligence and culminates with an action. The process is further enriched with the integration of third-party data to improve decision intelligence and “after the trade” AI to optimize future decisions.

As a result, treasury management pricing is an albatross for many banks to manage and optimize. According to a Novantas analysis, the average regional bank has more than 500 treasury management service codes and manages at least 20 price lists. This results in thousands of individual price points to manage at each bank.

Figure 4: 2021 Top Treasury Priorities

Rank 2021 Rank 2020 Rank 2019
Cash forecasting improvements 1 1 2
Liquidity or working capital management 2 4 1
Bank services optimization or RFP 3 3 4
Optimization or replacement of TMS 4 11 9
Enhance fraud/cybersecurity controls 5 10 8
Next in line were:
Support for acquisition/divestiture, LIBOR replacement, debt issuance, improvements of payment process

Figure 4: 2021 Top Treasury Priorities

Next in line were:
Support for acquisition/divestiture, LIBOR replacement, debt issuance, improvements of payment process

Amongst participation in the State of the Treasury Profession survey, enhancing operational automation and TMS optimization jumped from the #11 priority in 2020 to the #4 priority in 2021. So, this is a fast-moving space and the race is on.

Ultimately, there are three potential paths for banks. The first is that banks own the space, find a way to aggregate more real-time financial data from their customers and build best-in-class tools. The second is to partner with TMs and forecasting solution providers to provide value added decisions and integrate with the bank’s execution capabilities. The third path is to become a commodity service provider. The first two options can work well for banks, but they will require an intentional and proactive strategy to retain and expand their influence through the client cash management value chain.


Enhanced fraud and cybersecurity controls jumped from the 10th priority to fifth position. And with an escalation in the frequency and severity of cyber events (e.g. SolarWinds, Colonial Pipeline) we would expect this focus will only continue to rise. Banks can play an important role in helping their clients mitigate fraud.

Treasurers have clearly articulated the areas in which they need help – forecasting their cash, managing their cash and protecting against the growing risk of fraud. In each of these areas, banks have a unique capability to combine their data, expertise, and technology to assist corporates.

Commercial Deposit Rates Show Divergence AMID MARKET UNCERTAINTY

Short-term rates remained ultra-low in the first quarter, but there is also an increasing amount of uncertainty about future rate scenarios as the middle of the yield curve steepened a bit and inflation indicators ticked up. Against this backdrop, commercial deposit rates continued to grind a few basis points lower on average and there were still broad disparities in portfolio pricing.

CDA data show that the top quartile of ECR rate payers averaged 38 bp in the first quarter, while the bottom quartile averaged 15bp. The effective ranges are slightly tighter when taking into account differences in deposit assessment fees. We saw similar dynamics for interest-bearing portfolios where average rates were 12 bp for IB DDA and 14 bp for MMDA. In both of these products, top rates were in the mid-to-high 20s and the lowest-priced portfolios were near zero. (See Figure 5.)

Figure 5: Middle Market Portfolio Rates, March 2021




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 | Bottom quartile ECR avg. includes a few banks with low ECR / low DAF strategy

In the near term, we would suggest that higher-rate payers continue to look for opportunities to bring down interest expense. Outside of very specific acquisition scenarios, our view is that modestly higher rates are unlikely to be the deciding factor in acquiring and retaining primary relationships in this environment.

With an eye slightly further out the horizon, we would suggest that banks take the opportunity now to plan for a range of potential rate scenarios. Our base case anticipates elevated balances and limited rate-based competition for the foreseeable future. But in reading the market signals through the first quarter, the range of potential outcomes appears exceptionally wide at the moment. We therefore recommend planning ahead to forecast which balances will likely stay or go under a range of scenarios and establish playbooks for where and how the bank would use rate in a scenario of higher inflation and/or tighter monetary policy.

Additionally, now is the time to invest in the infrastructure to manage rates in a more volatile environment. The best time to integrate benchmarks into pricing processes is before market volatility picks up.

Peter Serene (

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