42 MARCH / APRIL 2023 DIRECTORS / SENIOR MANAGEMENT BattleReady Cost of Funds strategies to win the war Achim Griesel President Haberfeld Achim@Haberfeld.com Haberfeld is an associate member of the Indiana Bankers Association. When rates were at record lows for long periods of time, the true value of low-cost funding may have faded into the background; however, low-cost core deposits continue to be the driver of long-term franchise value. Now, with rates continuing to rise – the one-year treasury exceeded 4% in September 2022 – the importance of low-cost funding is once again at the forefront. The chart below is for a financial institution with strong low- and no-cost funding. In record low-rate environments, its cost-of-funds advantage over its peers was relatively small at 20-30bp. When rates started to rise from 2017-2019, it tripled to 60bp. For a $1 billion institution, that represents a $6 million increase to the bottom line. The current rising rate environment will lead to similar increases in profit. In addition, deposit growth stagnated in Q2 of 2022. On the macro level, FDIC insured deposits were down for the first time in a long time, and they were down significantly at 1.85% from the prior quarter. On the micro level, our data for consumer and business checking account deposit balances shows balances are down 3% and 7%, respectively, from the beginning of 2022. Even more importantly, the entire balance decline happened in May and June 2022, a trend we anticipate will continue. Large institutions are aware of the value created by low-cost deposits, and they have the budgets to target core relationships that drive these benefits. For example, Chase is back to its $600 offer for opening a checking and a savings account. BMO Harris pays up to $500, and Citi has an offer of up to $2,000 for relationships with extremely high balances. In addition to the cost of the offer, these largest banks spend a significant amount of marketing dollars to gain new core relationships and the benefits that come with them. When a financial institution does not commit to an always-on marketing strategy, it must provide above market offers to “buy” new relationships. Community-based financial institutions (FIs) cannot compete by following a similar strategy. Unlike their large competitors, community-based FIs Sean Payant, Ph.D. Chief Strategy Officer Haberfeld Sean@Haberfeld.com
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