November 15, 2004
The Deposit Growth Challenge
As we meet with bankers across the country, we’re hearing a consistent concern about deposit growth. Here’s the problem:
- Deposit growth has slowed dramatically
- Banks need more deposits to fund improving loan demand
- Banks have built more branches in the hopes of capturing increased deposit share, leading to greater competition
- Free checking is ubiquitous – virtually everyone has it for consumers, and increasingly banks are offering it to businesses – so how will banks attract customers at a reasonable cost?
For the past several years, bankers enjoyed an attractive business environment as consumers withdrew funds from the stock market and mutual funs because of poor performance in these historically attractive investments. With few alternatives to pursue, consumers and businesses parked excess funds in banks. From 1998 until 2003, there was an approximately 7% compound annual growth rate in bank deposits, a level far exceeding historical norms.
When planning for 2005, consider this unpalatable fact: the wind won’t be at our backs when it comes to deposit growth. The economy is starting to recover, interest rates are slowly rising, and the stock market is performing better. Mutual fund inflows are the best in years. A recent report by Prudential Securities forecasts a drop in deposit growth from the 7% we have enjoyed in the past few years to a more normalized 2-3% annual growth rate – unquestionably a more difficult environment.
The uphill climb to increase deposits will be even steeper because of increased bank competition. Banks have been on a branch-building binge, with the number of overall branches growing roughly 10% despite industry consolidation. More branches fighting to attract deposits + shrinking deposit growth = more aggressive pricing and promotion as banks compete to garner the deposits they need. Free checking and free online bill payment are already ubiquitous, so banks will have to do more to attract new customers.
Bankers cannot simply concentrate on other areas, leaving deposit growth to take care of itself. Loan demand is growing, and the loan-to-deposit ratio is relatively high for this stage of the economic cycle. Growth in home equity loans has been particularly sharp: for the past 4 years home equity has been growing at a spectacular 18% compound growth rate. Most banks are also reporting improved C&I growth, which will further exacerbate funding pressure.
What is your plan to attract profitable deposits in 2005 in the face of slower growth, more costly promotion, and greater competition? We believe there are a few key strategies that can result in significantly higher deposit growth and improved funding costs.
We’ll discuss these strategies, and some of our client success stories, in the next few newsletters. In the meanwhile, please email or call us at 800-565-6345 for additional information.
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Peak Performance Consulting Group is one of the leading consulting firms specializing in financial services. For additional information please email info@peakconsultinggroup.com,call us or visit our web site.
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(c) Peak Performance Consulting Group, 2004