Setting the Table for Balance Sheet Growth When Interest Rates Fall

Posted by Tim Keith on Feb 22, 2024 11:15:00 AM


Though it is unclear how far the Federal Reserve might go, or when it might act, there is a growing consensus that interest rates will start to come down later this year.

Several financial institutions were caught off guard by the sharp rise in rates that began two years ago, spurring intense competition for lower-cost deposits, cooling loan demand, and creating chaos with securities portfolios.

It is critical to be prepared to take advantage of falling rates. Here are our recommendations for putting your financial institution in a good position to grow the balance sheet when the Fed finally acts.

Evaluate Your Depositor Base

By our estimates, $500 billion of deposits are locked into CDs that should be up for renewal over the next six months. While many competitors may look to get all those depositors to roll over into a new CD, we advise taking a more analytical approach.

Take a deep dive into those relationships to filter out the single-product households – those that only have CDs at your bank or credit union. Remember that targeted marketing is the only way to compete with bigger banks – be ready to invest.

Identify customers who have other accounts – or a high likelihood of adding more – and reach out to them with renewal messaging that features rate offers that are attractive, yet sustainable, over time. Doing so should improve your revenue over the long run.

It is equally important to understand the difference between depositors who value liquidity over pure yield. Some people favor ease of access instead of rates. Identify the customers who have money market accounts with you and CDs elsewhere.

Have discussions with those customers about what they need from their deposit relationship – a process we call money market activation. You might even be willing to pay a slightly higher rate to get someone to opt against renewing their CD at a competitor to open (or add) an MMA with you.

Re-evaluate Lending Opportunities

Many financial institutions have hit the brakes in various lending categories, either because demand has dried up or they’re tightening up underwriting to stay ahead of credit cracks. This makes sense.

However, we do see an opportunity for banks and credit unions that ascertain the difference between life-stage loans – auto loans and mortgages, for instance – and cycle-dependent loans.

You need to keep an eye on those rate-dependent segments of the market, which include commercial refinance and customers who are poised for growth. Step up your outreach to those clients and prospects.

Now is the right time to have meaningful conversations with rate-dependent borrowers so you can improve your chances of making loans when the Fed easing starts.

The Bottom Line

Making the most out of your balance isn’t going to be easy. Checking household movement is still not back to pre-pandemic levels as higher rates led more people to move into MMAs and CDs.

The challenge in 2024 will be getting many of those people back into your financial institutions, and then slowly migrating them into lower-cost deposit products. SRM is ready to help you put together a comprehensive strategy to identify the best opportunities and implement a strategy to achieve your goals and objectives.

Topics: Deposits, Loans, Customer Experience, Balance Sheet Management, Interest Rates, CDs, Money Market Accounts

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