Publications & Resources

March/April 2008
Focus: Building Franchise Value

Deposit Gathering: Building the Balance Sheet Profitably in Today’s Tough Environment

By Rich Weissman

Banks are challenged today in growing deposits, and doing it profitably. Why is profitable deposit growth so difficult? First, the rate environment is challenging. Banks are typically accustomed to a normal (and often declining) rate environment, producing high margins. Although the yield curve has flattened, reached a point of inversion, and is only now normalizing, it is not where margin will grow significantly. It will take time for the yield curve to settle down. Second, the economy is challenging, where consumers simply aren’t saving money and the deposit pie isn’t growing fast enough. Many are in high debt (particularly with the implosion of the subprime mortgage market and the ripple it has throughout the economy) and are in no position to save. And, consumers are seeing their net worth erode.

With many markets seeing housing prices decline, with many feeling the pinch of being overly extended in debt, and with the current stock market rollercoaster, the consumer is more likely to be watching their money more carefully and shopping around for the best deposit “deals.” On the business side, sales are not as high as would have expected, and money is simply harder to get. All of this translates into a market for deposits that is tougher for banks, in both absolute dollars, profitability, and competitively.      

So what do we do?  

The first thing is NOT to panic and NOT to react with deposit gathering programs that are detrimental to current and long-term profitability. Across-the-board, low-end promotions bringing in $100 checking accounts, or across-the-board high-end promotions bringing in CD dollars at well above market rates won’t get us there. Instead, we need to think smart. There are many strategies for helping banks work through this difficult period. Although each strategy is unique to each bank, here is one idea: 

To start, understand that banks typically think in terms of the net interest margin on an account or product portfolio. Instead, think in terms of net interest margin on a customer relationship basis. We know that the margins on some deposit products are excellent, while the margins on others are thin and sometimes negative.

So how do we combine these to ensure profitability and deposit growth at the same time? Here’s an example. A bank has a large base of CDs coming due in a short period of time. These CDs were booked at higher than market rates during a previous CD promotion. The bank is concerned about the potential loss of these deposits. Initially, the bank thought in terms of simply having another higher than market special promotion at the time these CDs come due. But, what if we learned that 60% of those customer relationships with the high rate CDs coming due do not have a checking account with the bank, and that 15% have a low balance “free” account?

Rather than having a general market promotion for high rate CDs, the bank can specifically target the base of CD renewals through an offer specific to them. The bank can offer a high rate for renewal, but position it as part of an overall package of deposit products. The bank can require an interest checking and a money market account (since these products are most likely to be held by those with the CDs, but at another institution) as part of the premium CD. If the interest checking and money market account products are priced to require a high balance to earn interest and avoid monthly fees (and balances in both interest checking and money market account products are typically quite high), then the bank can afford to offer a high rate on the CD, knowing that the “all-in” interest expense for the customer relationship will be much less as they bring in new interest checking and money market account deposits. By evaluating the database for those who are coming due with their CDs, applying known adoption rates and calculating the “all-in” interest expense, the bank can offer a high rate on the maturing CDs, knowing that the overall interest expense on the customer relationship will be much less. The break-even point can be assessed, and a special offer can be made exclusively to the maturing CD base.   

This is just one such strategy, demonstrating a different way to understand that deposit growth and profitability do not need to be at odds. Through sophisticated database analysis and unique ideas, quality strategies can be developed to help banks through this tough period. 

Rich Weissman is the president and CEO of DMA in Portland, Ore., a national systems and service provider to banks and credit unions throughout the U.S. and Canada He can be contacted at 503-736-9490 or rich.weissman@DMAcorporation.com.  

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