It is no secret that banks throughout the world are rediscovering the importance of retail bank deposits as a stable source of low cost financing, especially in comparison to raising capital in this financial environment.
However even deposit taking is not something to be undertaken without caution, especially in a hotly competitive market like this one. Much of today’s deposit base is being brought in at negative spreads and almost all of it is being landed with negative value after costs. This doesn’t mean it is the wrong thing to do – deposits are still much cheaper than capital – but it does mean that pricing discipline has been suspended by many banks in the rush to obtain funding from this source.
The obvious consequence is negative spread business loading our retail portfolios, but there are other, more subtle effects as well. Product profitability is being distorted away from cyclically normal values due to abnormal spread compression. The same effect flows through to customer profitability metrics…negative spread deposits will drive down the profitability values of many of your best customers, which can impact customer experience management. At the same time branches and ultimately the entire retail franchise are booking business that will distort their long term value negatively.
So what should we do ? In our view competing aggressively for deposits in today’s market is certainly a good strategy, but we need to manage rate concessions carefully. When order resumes in the capital market implementing rational price optimization mechanisms for retail deposits should become standard practice. We also need to adjust our key performance indicators for product, branches and customers right now to insulate them from the abnormal spread shocks we are taking into our portfolios. The effects are significant and long lasting…are you managing your metrics through the crisis ?
