24 MAY / JUNE 2019 DIRECTORS / SENIOR MANAGEMENT Deposit Betas Under Pressure Matt Harris Senior Vice President The Baker Group mharris@GoBaker.com The Baker Group is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member. In science class we were taught that pressure is the application of force against an object. As bankers, we are constantly experiencing this phenomenon with our depositors and rates. Presidents, chief financial officers and other risk managers across the country are now sharpening their pencils and focusing on how much their institutions’ deposit rates impact net interest margin and bottom line. In asset liability committee (ALCO) lingo, the term “beta” is used to describe the relationship between deposit rates versus their sensitivity to the change in short-term interest rates. It’s been a while, but since December 2015 the Federal Open Market Committee has increased the federal funds target rate nine times, totaling 225 basis points to the current level of 2.5%. Until last year, the general feeling was that deposit betas were much lower when compared to previous rate cycles. Those feelings were in large part confirmed as banks calculated deposit rates ranging less than 20% on their deposit rates, versus historic cycles usually ranging from 30% to 45%. Many industry experts have studied why deposit betas have been subdued this time versus past cycles. Some reasons include: the massive amount of bank reserves versus historical levels, increased regulation, higher noninterest cost, and management’s desire to maintain margin levels consistent with what they’ve experienced over the last two decades. Customers are starting to pay more attention after experiencing four hikes last year and due to competitive rates now hovering around 2% above inflation rates, implying a pickup in real earnings. Toss in growing funding needs and changing customer demand competition (think fintech), and you have the perfect recipe for higher deposit betas. The review and analysis of deposit rates and their projected betas is never a one-size-fits-all approach. Variables such as geography and market competition weigh heavily on the sensitivity of these rates. New York and the Southeast region tend to have the highest deposit betas, while areas in the Midwest have the lowest. In more competitive markets, we’re beginning to see certain products being tied to short-term interest rates (for example, 50% of prime rate). By tying your non-maturity deposit rates to shortterm rates, you remove flexibility to manage these rates, which can be challenging in a rising rate environment. Another factor is institution size; community banks have been slower than regional and big banks, but will likely have to play catch-up if they lagged over the last three years. One interesting trend we are seeing is banks’ spending more time improving and incentivizing their deposit operations departments. While it’s long been the norm to establish programs like this in the lending area, these individuals at the bank are vital in providing low-cost funding, which can then be deployed in earning assets such as loans or securities. ALCOs are rolling out new customer loyalty programs and improving customer relationship building training with office administrators and controllers at their commercial accounts. Below are some other useful ideas to help lower your deposit betas: • Limit rate advertisements – focus on quality of service and products offered; • Tier certain deposit products and manage their rate changes separately, creating some low beta products (most often with lower balance tiers); • Focus on certain demographics that exhibit low deposit beta behavior;
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