Over the past year, I’ve had several clients ask for help in addressing the pressure put on with a rising rate enviroment resulting in shrinking NIM and heightened scrutiny by regulators. It’s important to note that building a core deposit base franchise should be a continued focus with a strategy that is aligned to for growth in all economic cycles. This means banks should track not just a loan-to-deposit ratio but an asset-to-deposit ratio due to slowing loan growth and growing investment portfolio assets that will act as a loan surrogate.
With the pressue of economic tightening, more depositors have demanded higher rates and as a result the industry has seen a 30% decrease in non-interest-bearing deposit levels since 2021. And as rates have “leveled off” since the spring, and with the delayed Fed tightening that was anticipated earlier in the year, some banks have even elected to trim rates in an attempt to restore historical NIM- only to have to increase the rates once runoff insued.
Experience has taught me that there are 4 components that need to be considered in building a stable, core deposit book. These components are 1) Target the right industries; 2) Offer relevent products with clear value and trade offs; 3) Ensure training and incentives are aligned to the value of deposits; 4) Make sure that proper contingencies and risk management policies are understood and actively managed. Let’s take a look at these one at a time.
Target the right Industries: Too many times I see the deposit business as an afterthought that is delivered through generalist (retail banking franchise) or specialty services (Treasury Management, Public Funds, Correspondent Banking, MSB services, Property Management). Instead of servicing as a compliment to the overall community banking services focus, we tend to like to find a magic pill which will fund our lending activites. A good place to start is with working through your data, and understanding your deposit book in terms of concentrations of risk, profitalibty, seasonality, tenure/duration, and price sensativity. Moreso, as time goes on you will find industry segements within your trade area that are underserved and overlooked. This means finding where price/rate and convenience of access can be better maintained. Investing the time to understand what clients segments you serve well and why through interviews, focus groups, or just simple data mining analysis will give you a leg up on where you want to spend your calling efforts.
Offer the right products: This means having not the latest TM services, but have products and more importantly policies that are aligned to provide compelling value to the clients. How many times small business players are offended by Reg CC holds from larger institutions, or random annoyance fees? Build a product line that is easy to understand, has compelling tradeoffs, meaningful competitive value, and can be fulfilled simply. Make sure that it aligns with your digital offerings, provides flexible user access, transparency, and most of all, is really good at consistently delivering what really matters to your target client.
Incentives and training: Virtually every bank that I have worked with over the past 7 years has strugged with not making sure that core deposit value is aligned with incentive plans. This means building a proper Funds Transfer methodology that provides the proper incentive for pay for both retail and commercial calling officer and staff. Moreso, push product knowledge forward as close to the customer as possible, instead of keeping it in the operational backroom. Deposit services, unlike loans, is a business where many things can go wrong in the routine of a daily transaction. Being responsive through identification of issues quickly can be a material competitive edge for customer facing branch and calling officer staff.
Policies and Measurement: Don’t just go through the motions of considering contingent liquidity and leave liquidity as a ALCO meeting subject. Fed Regulators want banks to see deposit diversification by customer, by customer type, by geography and by duration. They want to see different sources – that could be FHLB, deposit programs or networks or the brokered sweep market, so that the risk of a large amount of liquidity walking out overnight goes away. Make sure that you have as many contingent funding sources in your arsenal as possible. You don’t have to use them all the time, but you must prove that you can use them. The more that the value of deposits are understood and focused upon throughout the organization, the more this effort will be a force multiplier for shareholder value growth and risk mitigation.
A good deposit book starts with an integration of all of these functions into a coherent strategy- supported through a consistent communications via marketing, client transaction monitoring, proactive calling efforts (to increase share of wallet, manage maturities, and product upgrades), and reporting. The more that each line of business has a core deposit strategy aligned to their daily activities, the faster the bank builds franchise book value. Routinely, clients that have made the effort to update their deposit gathering activites through these steps have increased non-interest deposits by 25%, or through data mining has focused on lower price sensitive deposit gathering efforts resulting in a 20% improvement in NIM. To coordinate these activities, it is important to have executive level focus, board understanding and routine progress discussions.