Winning the competition for bank deposits

Are deposit rates finally about to rise?

Looking back, it was the same time last year when I was working with my team on the 2017 Banking and Securities Outlook. Of the themes we had analyzed, deposit trends in consumer banking remained one of my favorites. We had posited that “retail deposit costs may rise faster than expected, as liquidity coverage ratio requirements place a premium on high-quality stable funding.”

September 6, 2017

A blog post by Richa Wadhwani, assistant manager at Deloitte Center for Financial Services, Deloitte Services LP.

Following the deposit theme all this while, it has been interesting to see how banks have maintained low deposit costs so far in this rate tightening cycle (December 2015-ongoing). Deposit beta, a measure of how much of the change in interest rates banks pass on to their depositors, was just 13 percent in Q1 2017.1

This beta was significantly lower than deposit betas in the last rate-tightening cycle (June 2004-June 2006), with 41 percent in 2005 and 62 percent in 2006.2 Of course, I recognize that this tightening cycle is somewhat different from those in the past—rates rose pretty dramatically in the last cycle (4.25 percent in the course of 24 months),3 while the pace of rate tightening is more gradual this time (1 percent over 21 months until August this year).

However, such lower deposit betas will likely not last long. Bank executives expect an increase in deposit betas in the rising rate environment, as technology-savvy and rate-sensitive customers become more “rate aware.”4 On the supply side, competition may increase especially with online/direct banks, which tend to offer attractive yields.5

In fact, the Federal Reserve’s $1.5 trillion reduction of its balance sheet (likely starting later this year) could result in a deposit drain and push deposit costs.6 With the Fed not reinvesting the principal proceeds from maturing securities, liquidity will be pulled from the markets and banking system (reversing the trend of flushing money into the system with QE).7

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Analyzing deposit betas

Not surprising, it is not a question of if but when will deposit rates rise. And to be honest, one does not need to look very far in the future to predict the when (figure 1).

implied-deposit-data.jpg (1000×417)

Source: S&P Global Market Intelligence

The question worth analyzing though is which banks will raise rates sooner and which ones will maintain their edge of lower deposit betas. With other conditions remaining the same, the degree and pace of the Federal rate hikes that banks pass on to their depositors could largely depend on two factors: loan-to-deposit ratio and deposit composition.

Banks with a higher loan-to-deposit ratio, such as small-cap or community banks, appear to be raising rates faster, as they want to retain funding for their current loan book, especially retail deposits.8 They could begin with selectively offering higher rates on savings accounts and certificates of deposits (CD), such as CD specials, especially to rate-sensitive customers. In addition, markets with a strong potential for loan growth will potentially push up deposit rates earlier in the cycle.

Further, banks with high reliance on wholesale funding or long-dated retail time deposits may raise rates sooner, while those skewed toward retail core deposits may enjoy lower deposit betas at least in the next couple of quarters.

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Banks with a higher loan-to-deposit ratio, such as small-cap or community banks, appear to be raising rates faster, as they want to retain funding for their current loan book, especially retail deposits.9

Looking ahead

We are already seeing some early signs of this trend. US banks’ second-quarter earnings indicate they are beginning to raise rates for commercial and affluent clients while maintaining low rates for retail depositors.10

In the case of retail depositors, the convenience of consolidating products with one bank or a nearby branch/ATM location could be bigger incentives to maintaining status quo than switching to another bank for a somewhat higher-rate deposit account. Of course, this trade-off is not indefinite and customers may be incentivized to chase options when rate rise meaningfully.11

Looking ahead, as I and my team pen down our analysis for the 2018 banking outlook, I expect a healthy base of core deposits will likely become an even stronger competitive differentiation. As competition for deposits heats up, what strategies is your bank using to maintain its deposit edge?

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Chris Vanderpool and Nathan Stovall, “Double-digit ROEs in Sight for US Banks,” S&P Global Market Intelligence, March 15, 2017.
Federal Funds Data Historical Search, Federal Reserve Bank of New York, accessed on July 26, 2017,
“JPMorgan Chase & Co Corporate Investor Day Transcript,” Thomson StreetEvents, February 28, 2017.
Maria Tor and Venkatesh Iyer, “Rate Tracker: Some Online Banks Begin Sweetening Savings Accounts,” S&P Global Market Intelligence, July 1, 2017.
Binyamin Appelbaum, “Fed, Leaving Rates Unchanged, Expects to Wind Down Stimulus ‘Relatively Soon’,” New York Times, July 26, 2017.
Matthew Monks, “JPMorgan Tells Banks to Partner Up as U.S. Deposit Drain Looms,” Bloomberg, May 9, 2017.
Kristin Broughton, “Deposits Take Center Stage in Banks’ 2Q Earnings,” American Banker, July 21, 2017.
Kristin Broughton, “Deposits Take Center Stage in Banks’ 2Q Earnings,” American Banker, July 21, 2017.
10 Ibid.

QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.

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