bg-arrow-down icon-arrow-up icon-back-to-top icon-linkedin icon-menu icon-search icon-twitter logo-white slider-arrow-left-gray slider-arrow-left slider-arrow-right-gray slider-arrow-right

Fed Hangover: Churn Continues Despite Rate Plateau

The Fed announced the target for benchmark Fed Funds rate will remain unchanged at 2.25% — 2.50%. Despite nearly five months with no change in Fed Funds, the deposit market for retail and commercial customers has been anything but quiet.

An analysis of Novantas deposit data, which reflects $3 trillion in cross-bank commercial and consumer deposits, shows substantial increases in portfolio rates and elevated levels of customer balance shifts from low-yield to higher-yielding deposits. Proactive deposit management, including more granular approaches to pricing individual commercial customers, is even more critical to maintaining growth and yield discipline now as when rates were rising.

Since the Fed’s last increase in December, promotional rates for retail savings and money market (MMDA) deposits have increased meaningfully — approximately 18 bps at both larger regional banks and direct banks. This represents a 70% beta over the last Fed hike, similar to the level observed on promotional savings/MMDA in 2006 following the final Fed increase of the prior cycle. Promotional CD rates have remained relatively consistent across all bank categories partly due to the inverted yield curve.

More significantly, portfolio rates have increased nine bps for savings/MMDA and 22 bps for CDs from December 2018 through March 2019. (See Figure 1). The portfolio-rate increases are consistent with the trend observed in the 2006-07 rate plateau when the overall cost of interest-bearing deposits increased 21 bps after the Fed’s last rate increase. Portfolio-rate deterioration is now driven by levels of churn and attrition, which continue at recent levels and haven’t retreated to the slow-churn days of near-zero interest rates. That is in sharp contrast to earlier in the cycle when higher rates offered drove higher rates paid.

On the commercial side, recent deposit balance growth has been driven nearly entirely by growth in interest-bearing deposits, both IB/hybrid DDA and MMDA. The Novantas Commercial deposit study shows commercial balances are moving from NIB and ECR DDA products into interest-bearing products, driving up portfolio costs. Nearly all participating banks reported a decline in NIB DDA balances, including ECR DDA, in the fourth quarter of 2018 and the trend appears to have continued in the first quarter of 2019.

Commercial deposit costs are also increasing due to balance rotation more so than increases in IB rates. IB DDA portfolio rates increased modestly in the fourth quarter on a dollar-weighted average basis, increasing by seven bps from October to December. MMDA portfolio rates increased eight bps from October to December, largely driven by client movement from NIB to interest-bearing deposits. Early first-quarter results show continued modest increases, suggesting the trend will continue even as the Fed holds steady.

Despite the potential leveling of promotional rates, customer churn over the first three months of 2019 has remained consistent with levels observed through 2018. Novantas Consumer Comparative Deposit Analytics show switch rates of liquid savings from low-rate to higher-rate accounts continue at 20% annually through March, consistent with levels in the second half of 2018 and above an annual 8% rate in 2015. (See Figure 2). Attrition rates also remain elevated at levels 20-30% higher than the low-rate environment as promotional savings offers specifically continue to have lower retention.

Additionally, CD behaviors have not changed materially even as the yield curve has shifted. Acquisition mix has remained consistent at 2:1 savings to CD. Renewal rates for CDs continue to be down, averaging 80% in 2018 compared to 85-90% in 2013-2015. We expect consumer deposit mix to continue to shift away from savings and MMDA towards CDs as long as a yield gap remains – even if the gap narrows due to a flattening yield curve.

Year-over-year balance growth ticked upward in the fourth quarter as expected due to typical commercial deposit seasonality. But early reports from the first quarter indicate a more surprising increase in year-over-year balances; more banks are reporting balance growth than declines. (Figure 3). Although bank performance had been more divergent over the past five or six quarters (one-third to one-half of banks reported a decline over past quarters), the growth trend looks more positive now. IB and hybrid DDA balances grew 30-40% in the fourth quarter as ECR and NIB DDA decreased. Early reports on the first quarter show a similar trend.

Retail growth, meanwhile, remains relatively consistent with 2018 levels — lower deposit growth overall at an annualized 3%, with a majority of the growth driven by CDs. Retail savings and MMDA, while no longer negative, grew only at an annualized 0.5% through the first quarter, while CDs are growing at greater than a 15% level. Despite the inverted yield curve and the stagnation of promotional CD rates, the higher yields on CDs compared with savings accounts continue to attract retail clients.

Novantas modeling suggests the customer behavior and portfolio rate increases are linked more strongly to the absolute level of the rate environment as opposed to changes in the rate environment. Based on our modeling and experience from 2006-2007, we expect to see elevated levels of churn while the gap between promotional and standard rate deposits persists. As a result, overall deposit costs are expected to continue creeping up.

All banks should be developing strategies to mitigate this cost increase while maintaining retail growth rates and recognizing the continued momentum of customer dynamics. Leading banks will plan proactively for different potential scenarios, ensuring that their actions maximize opportunity regardless of future Fed moves and that timing and entire product portfolios are optimized.

Adam Stockton
Director, New York

Chrystal Pozin
Director, Chicago

Andrew Frisbie
EVP, New York

Pete Gilchrist
EVP, New York

For more information, contact Novantas Marketing

+1 (212) 953-4444

Related Materials


US banks set for more deposit costs cuts after plunge in rates

The interest rate news has been grim for U.S. banks. Novantas’ Andrew Frisbie weighs in on deposit cuts after rate plunge.

novantas perspective

The Fed Makes Another Cut, But Can Betas Keep Pace?

The Fed just cut rates for the third time this year, a move that will keep pressure on bankers as they race to reprice their books.


When Fed cuts rates, deposit prices likely to follow quickly

U.S. banks were cautious about their ability to control deposit costs when interest rates were rising, often expressing surprise that prices were not more sensitive to increases in benchmarks.