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‘Easy Money’ Is Harder to Come By as Deposit Betas Surge

The Fed’s move today to raise its target interest rate to a range of 2.00% – 2.25% comes at a time when banks are already grappling with rising deposit costs. The higher betas that were reported in Q2 and are expected in Q3 will force commercial and retail bankers to respond with tactical and strategic actions in the coming months.

Promotions Drive MMDA Balances To Higher-Rate Offers
By Vladana Zlatic | Manager, Toronto |
and Andrew Frisbie | EVP, New York |


Money market deposit accounts (MMDA) have been remixing to higher rate liquid and term offers since
the start of 2017. As of July 2018, 22.3% of MMDA balances were switching to higher-rate liquid offers, while roughly 3.3% were switching into CDs on an annualized basis, according to a new analysis from Novantas’ 24 Comparative Deposit Analytics bank participants that represent $2 trillion of retail deposits. (See Figure 1).

Retail customers are more likely to remain in the same product category when switching balances, with less than 15% of liquid balances switching to term and vice versa.

This trend is also driving an increase in savings portfolio rates, particularly for the $100K+ segment, which has increased by 25 bp over the past year. (See Figure 2).

Much of this shift in behavior can be attributed to higher promotional offers available in the market. The average switch in rate from savings (the rate received by customers who switch balances within the same institution) has increased by 50 bp for balances switching to other liquid products, and 100 bp for those switching to CDs.

Source: Novantas Comparative Deposit Analytics (CDA) Database, September 2018 | All CDA banks excluding Online line of business | Simple average used to protect participant anonymity | Data analyzed from Jan 2015 to Jul 2018



Commercial deposit rate betas increased at a faster pace in Q2, likely signaling that commercial deposits have reached an inflection point and also reversing the significant lag from earlier in the rate cycle.

In June 2018, banks reported an increase of 10% on acquisition rate betas from the previous quarter for both earnings credit rates (ECR) and money market deposit accounts (MMDA). These figures reflect the movement in deposit rates since the Fed started raising rates in December 2015 to the recent target rate of 175 basis points (bp). It also represents an increase of more than 17 bp in Q2 acquisition rates. ECR acquisition betas also are increasing, though they remain lower than MMDA and other interest-bearing deposit products. (See Figure 1).

As expected, rate betas are even higher when measured against each single 25 bp hike by the Fed. Banks reported premium deposit acquisition rates increased at 100%+ beta between April and June 2018, reflecting the June rate increase. Some 80% of banks reported an increase of at least 25 bp in premium acquisition rates for at least one deposit product, resulting in an increase in median premium acquisition rates of more than 40 basis points.

The range of competitive rates offered across banks is also widening. Banks are competing for new deposits with rates that vary by more than 150 bp (See Figure 2). This wide range reflects the varied levels of sophistication in pricing deposits. Furthermore, it suggests that rate is not being consistently deployed in an optimal fashion.



Commercial deposit balance growth remains flat despite the rising rates, reflecting divergent growth performance across banks. Growth trends are split among banks as they have been since January 2017, with about half reporting deposit growth and half seeing balances decline.

The top-performing banks grew commercial deposits by an average 6% annually as of Q2, while the lowest performers saw balances decline by 7%. For most banks, increased rates are not driving balance growth.

Notably, the banks that see the highest balance growth frequently don’t unilaterally offer the highest rates; we continue to see low overall correlation between deposit rates and balance growth. However, top performing banks did generally offer above-market acquisition rates on their interest-bearing deposits (interest-bearing DDA, hybrid DDA and MMDA) even though their average portfolio rates were not higher than peers.

These banks also generally had a clear product strategy to grow specific deposit balances and often concentrated on one to two products with growth rates of 20% or more to offset declines in other deposit products. The top-performing banks generally didn’t see growth across many deposit products.

Aggressive ECR DDA and MMDA pricing is failing to translate into net gains in balances within each product. Banks aren’t seeing rate elasticity in two key products — ECR DDA and MMDA. Balances continue to decline in these products despite increasing rates and betas. This is particularly notable with MMDA balances, which have seen the highest betas but have seen balances decline for two consecutive quarters. Banks are aggressively growing interest-bearing and hybrid DDA balances, but for many this is more of a remixing of balances to proactively capture “excess” operating balances before they start to seek yield in off-balance sheet instruments.

Goaling, Too, Gets More Complicated As Rates Rise
By Leo Rinaldi | Director, New York |


It is increasingly challenging to set accurate sales goals in a dynamic rate environment, particularly for the branch sales force. If sales targets are set too low, motivation decreases and underperformance may result. If goals are too high, morale declines and the temptation for unethical behavior rises.

As a result, bankers must be aware that sales-force goals may need to shift quickly in line with the changing demands of customers.

All bankers know that setting goals is difficult even in relatively stable environments. It is a complicated exercise that requires triangulating geographic sales opportunity, and staffing branches by role, historical sales volumes, and recent growth.

A more dynamic rate environment increases that challenge, highlighting the importance of accurate forecasting and goal-setting. For example, increased money in motion results in higher product churn and potentially higher sales volumes for certain products. Additionally, customers tend to shift from one product set to another, such as moving from money market deposit accounts into higher-yielding CDs. These changes can be accelerated by various product and marketing campaigns aimed at raising funds to offset customer attrition.

Critically, these changes will not impact all branches equally due to variances in the customer base and specific demographics surrounding an individual branch. For example, the deposit product team may target a 10% growth in CD sales. But that target may vary from 3% for a low-opportunity branch with a younger demographic to 20% for a high-opportunity branch with an older demographic.

To respond to these dynamics, many of our clients are rethinking their approach to goaling. These changes include applying more sophistication in forecasting year-over-year product growth, using competitor sales data to model the drivers of branch level sales, and forecasting individual customer behaviors within branch books of business.


As we hit the eighth Fed Funds increase, it is increasingly clear that the market has passed a tipping point in customer behavior. Consistent with trends from the prior rising rate environment, retail deposits have shifted towards CDs with greater velocity, starting after four increases in mid-2017.

Through June 2017, CDs continued to decline as they had since 2009. But growth in retail CDs turned positive in July 2017, coinciding with the fourth Fed Funds increase, and has steadily increased since then. CDs grew at an annualized 4.2% over the second half of 2017 and grew at an annualized 15.6% through the first half of 2018, according to Novantas’ proprietary Comparative Deposit Analytics (CDA) data. Meanwhile, Retail Savings and MMDA are down 1.7% since July 2017.

This re-emergence of CDs presents challenges for retail franchises, most of which have not sold CDs in large volume in more than a decade.

As in the prior rising-rate environment in 2004-06, this CD volume is predominantly short duration. In the low-rate environment, 25% to 40% of CD acquisition volume was for a duration of more than two years. But only 10% to 20% of CD acquisition has been longer than two-year duration since mid-2017, showing that customers are switching from savings to CDs, but only with a short-term lens.

CD renewal rates have also declined to historic levels. In the low-rate environment, CD volumes had declined to low levels and were predominantly “sleepy” auto-renewing customers. Overall renewal rates had increased to 85-90% following rate-sensitive runoff in the low-rate environment. As new rate sensitive CDs have returned to deposit books, renewal rates are approximately 80% for all short-term CDs, with renewal rates of 70% for CDs over $100,000.

Ultimately, this will also leave banks with increasing volumes of low-rate and standard-rate savings that may need to be repriced. Betas are rising, as are switch rates to CDs and high-rate savings. Success over the coming months will be determined through CD acquisition and back-book retention and margin management.


Banks need to closely monitor this renewed customer affection for CDs and plan accordingly. Since materially all retail deposit growth is coming through CDs, banks no longer have the option to sit out the CD market if they wish to meaningfully grow retail deposits. While high-priced promotional MMDA campaigns can still be successful, growth is now below that of CDs and post-promotion runoff is higher.

Banks will need to reorient sales tactics towards CDs, ensuring equal space with marketing, incentives and online account opening. With typical branch staff turnover every two to five years, a large percentage of front-line sales staff don’t even have experience selling CDs. Re-learning how to talk to customers about CDs, positioning the yield versus liquidity tradeoffs and working with customers around CD renewal events shouldn’t be difficult, but will take effort and thought.

As such, banks will need to recalibrate renewal strategies and tactics. Properly rotating promotional terms, proactive management of renewal bubbles and maintenance of promotional versus standard rates can impact the total interest expense for all CDs by 30 basis points or more. While common in the years prior to 2007, many banks have moved away from more complex CD strategies. They will need to return to manage costs as CDs become a more substantial portion of volumes.

Adam Stockton
Director, New York

Chrystal Pozin
Director, Chicago

Andrew Frisbie
EVP, New York

For more information, contact Novantas Marketing

+1 (212) 953-4444

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