Unlocking sustainable deposit book growth

Damian Young
— 1 minute read

As Australian banks seek to strengthen their balance sheets to protect from market crashes, the importance of data mining is likely to increase, writes Nomis Solutions’ Damian Young.

The majority of banks in Australia and New Zealand weathered the storm of the 2008 financial crash far better than their American and European counterparts.

During the fall out of the global financial crisis, they proved to have far less exposure to the complex financial instruments that decimated the balance sheets of global banks and escaped the volatility of the property markets that burst as a result of over-leveraging.

As the other markets set about picking up the pieces, Australian and New Zealand banks sensibly set about strengthening their own balance sheets in anticipation of further contagion.

However, a sizeable proportion of their funding comes from wholesale or "overseas cash" sources that, in comparison to European banks, remains a risk.

Most European banks fund assets with ~30 per cent or less from wholesale sources in contrast to up to 50 per cent in A/NZ banks.

However, since the adoption of Basel III liquidity/stability measures banks are increasingly seeking to grow core deposits to support the funding mix and provide a more stable basis for lending.

This policy was evident in the banks’ reactions to recent rate changes. Although not stagnant, Australia is currently in a low interest environment.

The current 1.5 per cent Official Cash Rate (OCR) has fallen from 2.5 per cent ~18 months ago, in a bid to stimulate economic conditions, but the last decrease in this rate resulted in deposits remaining at constant rates or even increasing in some banks.

The current short term predictions will see a reduction in the OCR in both Australia and New Zealand with longer term predictions for increasing rates in 2019/20.

Experience in Europe and elsewhere would suggest that the timing of these increases may be overly ambitious, but time will tell.

The shift towards greater deposits funding has been motivated by experience and by regulation. Under Basel III, banks are encouraged to decrease funding reliance on less stable sources and develop a more even funding mix.

Banks are also executing tighter restrictions on investor property lending and foreign investment levels in order to avoid a potential crash in the property market, which has been dramatically increasing in key locations in both Australia and New Zealand.

These restrictions aim to limit the banks' exposures in the event of a crisis.

As banks increase their reliance on deposit growth, the pressure on deposits managers in particular will increase dramatically.

Competition for market share in this new saving spree will be intense. The relationships that are formed and cultivated at this point will be a major factor in determining future stability and growth in both Australia and New Zealand.

Now is the time to establish a firm understanding of each customer and identify what they are looking for from their bank.

Banks will then be able to make more appropriate offers based on a real understanding of genuine needs. This understanding will also generate a better appreciation of deposit book potential and a more certain, sustainable future.

Data will be key to building this understanding. Banks already store huge amounts of customer data but they must exercise it to a fuller extent, implementing tools such as price optimisation software.

This technology produces an in-depth assessment of consumer attributes, behaviours and sensitivities, creating a strategy that will not only identify the right price position but also drive customer retention strategies, acquisition strategies, customer satisfaction goals, product design, channel selection and marketing/sales strategies.

By analysing the data in great detail, deposit managers will be able to pre-empt customer decision making in a certain situation.

For instance, when base rates change, some customers will simply go for the best rate in the market, whereas others will only switch for a certain rate increase, while other groups will remain with their current bank if they have a strong, secure relationship.

By undertaking more significant data mining and having pricing science at the heart of the business, banks can find the optimum balance of volume, margin, liquidity outflows and funds stability to achieve overall business objectives.

Traditionally, banks have used rudimentary ways of achieving this balance but all banks have experienced the ‘cost of not knowing’.

Investing in data and pricing science shifts this cost of not knowing to more accurate forecasting and planning that will result in better performance.

By universally understanding both customer preferences and market potential, banks can create a long-term, reliable growth plan, based on a firm assessment of customer loyalty and retention.

Establishing this relationship now will allow banks to build trust, creating a platform from which numerous other financial products can be upsold.

Challenges in the deposits portfolio will become more acute as markets evolve over the coming years.

Forward-thinking banks are tackling the issue now with better foundations and frameworks for utilising market and customer behavioural data.

Damian Young is the managing director of Nomis Solutions.



Unlocking sustainable deposit book growth
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