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Fed Move Comes at an Inflection Point for Deposit Costs

Today’s Fed Funds target rate increase — the seventh since December 2015 — arrives as the deposit market hits an inflection point on rate paid, betas, and customer behavior. Deposit portfolio rates are rising; bankers are responding to increased liquid runoff, rate-sensitive customers are switching products, and acquisition rates are going up for Commercial and Retail deposits.


While Retail promotional rates and Commercial exception rates have experienced steadily increasing costs since the Fed’s initial move, portfolio rate betas remained muted through 3Q 2017. Since the beginning of Q4, however, portfolio rates have risen across both segments.

Novantas’ Comparative Deposit Analytics (CDA) benchmarks demonstrate that the weighted average interest expense for Retail deposits has increased from 0.16% in August 2017 to 0.23% in April 2018, with increases of more than 0.10% in both savings and CD portfolio rates. Only checking portfolio rates have avoided material price increases.

Novantas’ Quarterly Commercial Deposit Survey tells a similar tale in Commercial portfolios. From October 2017 to March 2018, MMDA portfolio rates increased from 0.61% to 0.76% and interest-bearing DDA (checking) portfolio rates increased from 0.38% to 0.51%. Portfolio earnings credit rates (ECR DDA) have remained steady over the same period, though exception rates for new deposits continue to climb.

Three key trends are driving these portfolio rate changes: higher acquisition rates, more customer switching from low rate to high rate products, and Retail mix shifts into CDs and out of liquid accounts.

New Cross-Bank Benchmarking Analysis Shows Affluent Retail Franchises Are Leaking Deposits
By Adam Stockton

The steady growth in retail liquid savings reversed for most banks last year, with second-half performance tilting negative and breaking the steady growth bankers in MMDA and savings that banks had depended on for years.

The issue has been covered in previous Novantas Perspectives, but a new analysis of cross-bank “like customers” that spans our 25 Comparative Deposit Analytics bank participants (representing more than $2T of Retail deposits) shows this phenomenon hasn’t impacted all customers — or banks — alike.

Through 2016, retail customers with more than $100k of deposits across banks fueled the outsized gains in liquid savings, outpacing smaller-dollar customers by 3% on average. But the trend fully reversed in 1Q 2018 when smaller-dollar savings balance grew 3% more quickly than larger-dollar accounts.

Banks that are seeing a stall in their liquid retail deposit growth should consider several factors:

  • Is the trend being driven by customer mix or are you underperforming even with smaller-dollar depositors?
  • Have you considered customer treatments and targeting that are appropriate to the customer types where you are losing balances?
  • Do you have the ability to target and present relevant offers to those customers who may be looking to move to term products or potentially balances into investment accounts?

Banks can take the first step to potentially plug the leak of such valuable customers by considering these types of questions. Higher rates provide more compelling choices for customers, so such actions should be pursued as soon as possible.



After modest increases with the first three Fed hikes, Retail promotional betas have passed an inflection point — just as they did in the 2004-06 cycle. Promotional savings/MMDA has shown a 67% beta over the last three Fed increases compared with a 15% beta over the first three, and now stand at 1.25%. Promotional CD betas have shown a 95% beta over the last three Fed increases compared with a 37% beta over the first three, with the average promotional rate now standing at 1.48%. As ever, these averages don’t reflect geographic market behavior, that require bankers to tailor specific pricing strategies to their local competitive situation.

On the Commercial side, exception rates continue their rapid rise. From September 2017 to March 2018, exception rates on MMDA deposits increased from 0.81% to 0.96%, with premium exception rates reaching 1.52% in March 2018 (maximum rates offered on larger new deposits). Exception rates on interest-bearing DDA deposits increased 30 basis points from 0.45% to 0.75%, with premium exception rates hitting 1.15% in March 2018. Exception earnings credit rates remain largely stable, though premium exception earnings credit rates have increased over 20bps in the same period.

Notably, across both Retail and Commercial, standard rates remain relatively constant. When rates were low, the gaps between acquisition rates and portfolio rates were smaller than historical averages due to overall yield compression. The increased differential is causing anxiety — both at the bank line of business level and C-suite level. We suspect that standard rate repricing is near, with  more advanced banks deploying targeted treatments to avoid broad margin declines.



Consistent with Novantas benchmarks from the prior rising-rate environment in 2004-06, churn and rate sensitivity are increasing after an initial lag. Novantas CDA data indicate that retail balance switching — balance moves from low-rate to high-rate liquid accounts — has nearly doubled from an average of 8% per year to 15% per year. This increase alone has translated to a 0.07% increase in savings portfolio rates. Furthermore, Novantas cross-bank analysis suggests that higher-priced promotional accounts — and therefore larger gaps between promotional and standard rates — are strongly correlated with increased switching behavior. As rates continue to rise, rate pressure and increased switching will extend with higher rates more broadly available across the industry.

Within Commercial portfolios, Regional banks are experiencing a remixing of ECR DDA. Commercial deposit balance growth has slowed to nearly 0%; ECR DDA balances are declining, but balances are growing in interest-bearing deposits. If there is a continued increase in the rate differential, our next report may well show that industry Commercial deposit growth has swung to a negative.


Banks Need To Woo Customers Who Aren’t So Rate-Sensitive
By Sarah Welch, Director, New York

The sleepy bank customer is waking up.

Traditional banks have finally started to raise rates, but that mightn’t be enough for some customers who are increasingly aware that they can get better rates elsewhere. That is why it will be so important for banks to reach and connect with less rate-sensitive, more persistent depositors.

Indeed, a quick glance at the rates for savings accounts at the largest national and regional banks shows a gap of 10-15 basis points between their offerings and large digital players, like Goldman’s Marcus. Just how long will these banks be able to continue offering close to zero rates
on deposits?

Against this increasingly competitive backdrop, many regional banks are considering digital-first (and even digital-only) ventures to gather clients and grow deposits out of footprint — presumably at higher rates — without cannibalizing existing customers. Citi, PNC and Citizens are all in the process of moving beyond their current footprints with lower-overhead, digitally-oriented offerings.

The danger, however, is that banks will get locked into a rate “arms race” and acquire a book of less- stable, “hot money” deposits that will leave the minute there is a better rate from someone else. Banks will pass on some amount to customers with each new increase, but just how much — and how quickly — depends on their ability to compete on dimensions other than price.


After 10 years of decline, Retail CDs are again growing faster than savings/MMDA. When rates were lower, savings/MMDA grew by an average of 8% per year within the Novantas CDA dataset, while CDs were declining at 4% per year. Since August 2017, CDs have grown at an annualized rate of 10%, while savings/MMDA has declined by an annualized rate of 2%.

Banks that are not growing CDs have seen overall Retail deposit growth cut in half compared with pre-2017 growth rates. This means CDs are critical to deposit growth as rates rise. A substantial majority of this growth, consistent with the prior rising-rate environment, has been in short-term CDs. More than 70% of CD acquisition volume across CDA participants has been in terms of 18 months or less.

The level of rate competitiveness is hitting market segments differently. For example, a selection of mid-sized banks (those $10B in $50B in assets) are taking a more aggressive stance on under-18-month CDs, with more than 30% of institutions offering promotions above 2%. The risk for those players is that  balances attracted by these high-rate mid-sized players may move out of those banks upon maturity.

Notably, most bankers who are managing deposit portfolios have not yet seen these CDs mature since the growth only started taking off about nine months ago. Banks must be prepared to retain CDs as they renew and manage maturity schedules to smooth balance levels over time.

Econometric Models Can Predict CD Resurgence
By Ryan Schulz, Director, New Yor

A vexing task for Treasurers and deposit bankers alike has been to figure out if and when CDs would ever rebound from their long decline. While we see signs of a resurgence in CD balances, the forward trend remains the subject of spirited debate.

Many regional and larger banks employ longer-term econometric models (including Novantas’ proprietary models) that incorporate yield curve points and moving averages to provide a prospective view on when and how CDs might rebound in changing macroeconomic conditions.

Such longer-term econometric models infuse volume and spread projections with plausible views about balance sheet remixing in different rate environments. They also can feed into balance volume and spread calculations for PPNR, interest rate risk, and business planning applications.

So far, the models accurately predicted the turning point in CD growth, providing a crucial tool for banks to manage their balance and interest rate position. Looking ahead, they foretell a continued CD resurgence in the coming quarters if higher rates continue to materialize.



Banks are facing tough decisions on managing these rate decisions — even those that have seasoned bankers at the helm. Now that a more dynamic environment has arrived, bankers must act quickly and proactively to ensure they can meet deposit objectives efficiently:

  • Be prepared to shift strategies for acquisition. Plays that were effective in the low-rate environment are becoming less effective as the Commercial market shifts towards IB DDA and the Retail market shifts towards CDs.
  • Deploy your back-book plan. With switching levels increasing in both Retail and Commercial, banks must have a strategy to retain high-value customers in non-promotional, non-exception portfolios. Additionally, banks must prepare proactively for CD maturities to retain balances at economical rates.
  • Set a plan to keep higher-balance customers. Higher-balance customers are frequently driven by different factors that will push them to move their money. A “one size fits all” approach to price strategy will leave margin on the table and put those balances at risk of moving elsewhere — whether to another traditional bank or to a direct bank.
  • Keep tabs on account movements. Balances are moving among customer accounts, and between banks, faster than they have since the crisis. Be sure you have the right infrastructure in place to monitor and plan your responses accordingly.

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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