Pub. 12 2022 Issue 3

12 www.azbankers.org The Federal Reserve is winding down its tapering program and eyeing faster rate hikes to curb inflation. For banks, higher rates mean more revenue potential, but they also mean higher costs. Given this, it’s no surprise that our most recent quarterly survey showed that 63% of bank executives expect funding costs to increase over the next 12 months (a 34-point jump from Q3), and 42% expect competition for deposits to increase (an 11-point jump from Q3). This anticipated pressure on funding follows a two-year period in which banks have been completely saturated with liquidity. Meanwhile, 59% of executives anticipate loan demand to increase in 2022 (an 11-point jump from Q3), and 80% expect economic conditions to improve or remain the same. With the costs of funding soon to rise and the business environment showing signs of improvement, now is the time to begin preparing for the future. Below are two suggestions. 1. Lock in Cheap Funding While You Can While interest rates in general are expected to rise, the same expectations don’t extend to deposit rates. Recently, both The Wall Street Journal and The New York Times published stories explaining that, due to excess liquidity, banks won’t be raising rates anytime soon. Therein lies a tremendous opportunity. By lowering deposit costs and lagging rate increases, banks have the potential to generate more revenues than they have generated in a while. Even if customers leave in search of higher yields, any runoff could be supplemented with wholesale funding—which is currently cheap but may not be for long. Just imagine if your costs were slightly less—or even the same—as they are now, and rates increased by 50 basis points (for example). Why Banks Need to Prepare Now for Greater Costs, Revenues 2021, Q4 BANK EXECUTIVE BUSINESS OUTLOOK SURVEY 42% 53% 5% 41% 52% 6% 41% 56% 2% 41% 55% 4% 33% 57% 10% 43% 49% 7% 44% 54% 2% Total Improved Same Worse Improved Same Deposit Competition Fundin 8% 30% 8% 30% 6% 29% 7% 32% 10% 33% 9% 26% 4% 29% <$1B in Assets $1B-$10B in Assets Midwest Northeast South West 42% 53% 5% 41% 52% 6% 41% 56% 2% 41% 55% 4% 33% 57% 10% 43% 49% 7% 44% 54% 2% Total Improved Same Worse Improved Same orse I r Deposit Competition Funding Cos s Loa D 63 8 30% 62 8 30% 65 6 29% 62 7 32% 57 33% 64 67 9 26% 4% 29% 59% 57% 9% 58% 62 55% 71% <$1B in Assets $1B-$10B in Assets Midwest Northeast South West Topline overview of banker expectations for the 12 months ahead, broken out by asset size and region.

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