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Higher Rates and Competition Threaten Commercial Deposits

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The Novantas Quarterly Commercial Deposit Study shows a clear divergence in bank performance. Two-thirds of banks reported low-to-modest growth in Q4 2017, likely reflecting the cyclical increase in deposits that is common for year-end (Exhibit 1). One-third of banks reported quarterly declines ranging from 1-4%, which is unusual for the fourth quarter and may be the harbinger of future balance decline as rates continue to rise.

Commercial deposits became a larger source of stable, low-cost funding post-financial crisis. Rising rates pose a threat to this valuable funding base in two primary ways. First, higher rates and betas on off-balance sheet investments increase the opportunity cost for companies to hold balances in lower-rate deposits. Second, banks have more margin to use rates to win the most valuable operating deposits, which LCR regulation helped codify.

On a year-over-year basis (Q4 2016 to Q4 2017), 70% of banks reported either no growth or balance decline. Only two of the five banks that reported year-over-year growth have assets greater than $50B (Exhibit 2). The study, which was compiled and analyzed in February, represents data from 20 banks and represents nearly 60% of U.S. commercial deposits.


Despite the lack of balance growth, banks continue to hold deposit rates low relative to changes in market interest rates. This is similar to what we observed in the last rising-rate period (2004 — 2006), where deposit rate betas moved slowly for the first 150-200 bps in market rate movements (Exhibit 3).


Banks are increasingly dangling attractive rates to win new business. In Q4, banks reported typical exception rates for new deals that are 2-3 times higher than standard rates. Premium rates for the largest deposit deals are even higher.

This extreme range of competitive rates makes it challenging for banks to offer the right rates without giving up more margin than is required to win or retain business. With rates expected to continue to rise, it’s critical that banks gain deeper insights into customer behaviors that drive deposit value and align rates to these behaviors.

Chrystal Pozin
Director, Chicago

Zach Cagley
Senior Associate, Chicago

For more information, contact Novantas Marketing

+1 (212) 953-4444

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