How Second Quarter Bank Profits May Affect 2021 Deposit Playbooks

Most of the financial results for the first quarter of 2020 are available, and it’s no surprise that there has been a significant impact from COVID-19. Net income is dropping considerably, but in many cases this is primarily a choice as more cash is redirected to loan loss allowance (PLL) accounts.

Keep in mind that the majority of the first trimester was behind us before we saw widespread blockages related to the novel coronavirus, so we can expect to see a different story in the second trimester. May, the 1st CBS News cited a Black Knight study that found mortgage abstentions increased from 150,000 to almost 4 million between March and April. Consumer loans, credit cards, private student loans, and mortgages are all seeing a rapid rise in slow payments and non-payments.

For now, banks are trying to do what’s right for the customer and provide relief as best they can. Lessons were learned from the 2007-08 financial crisis about the value of defending customers, but as loan losses increase and timid new loan bookings reduce interest income, financial institutions will seek aggressive cost-cutting measures to help adjust the size of their income statements.

For the remainder of 2020, we can expect demand for loans to be depressed and any return to normal life will be a challenge. For 2021, cost reduction will likely be a guideline for financial institutions, and expense savings will start with the two biggest items in the income statement: salaries and benefits and cost of funds. Both are expected to have a major impact on the ability to efficiently collect deposits.

For the moment, a flight to security in the depots is adding to the production reports. We are seeing a significant increase in liquid deposit products for two reasons: first, customers want security and flexibility in their deposits; and second, most banks do not have the capacity to open term deposits online. With branches closed or with limited operations, the ability of customers to open a CD at the local branch is a challenge. The liquidity of inbound deposits will make it difficult to retain them as stock markets calm down and consumers return to normal.

In other words, we expect to see the ease of deposit taking down by the end of 2020. For most institutions, deposit taking remains a branch centric activity. This is problematic because as consumers have adapted to door-to-door orders and adopted more technology, there may be less need for physical branches, just as banks look to ditch expensive branches and staff to cut costs. .

A lean physical branch network will remove or inhibit an important driver of deposit growth for financial institutions and will likely come at a time when deposit collection becomes more competitive. We expect “easy deposits” – resulting from rising savings rates among top earners (discussed in more detail in a recent report). blog post by Nomis economist Brian Poi) and refugees fleeing to safety – to gradually decline by the end of 2020.

By 2021, we plan to revert to creating Targeted Deposit Offers and Special Offers (resulting in increased cost of funds). Commercial deposit “exception” pricing is likely to make a comeback after being virtually eliminated over the past two months. Next year will be a deposit strategy paradox – increase deposits to meet the plan, but reduce funding costs to meet spending targets. And all with a shrinking branch footprint.

As the saying goes, the best time to prepare for a crisis is when times are good, and the best time to prepare for a competitive deposit environment is when deposits are easy. By reducing the costs of filing now, funds can be redeployed to install tools and practices that will give your institution a competitive edge while everyone else is catching up.

Dustin Allen is Senior Director of Global Filing Solution at Nomis solutions.

Subscribe to “What do we do with deposits now?” “, a BAI webinar on Thursday, May 21, with Dustin Allen of Nomis Solutions; Chris Manderfield, responsible for KeyBank’s product management for the consumer segment; and Matt smith, Head of Direct Banking at Sterling Bank. The webinar will discuss deposit trends, where the industry is heading this year, and how banks can prepare for success in the future.

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