Dr. Dan Geller, Executive Vice President of Market Rates Insight and head of our research and analytics department, contributed the attached article to BAI Banking Strategies this week.
Institutions that are not practicing regional pricing are very likely mispricing their deposits, even in a low-rate environment.
When it comes to deposit pricing, the U.S. market is far from homogenous. An analysis of the average deposit rates in the 50 states and District of Columbia during 2011 shows that the spectrum of change in rates among the states ranges from -35 to +9 basis points (bps) for a total range of 44 bps. Such a large range is a clear indication that deposit pricing should be regionalized to avoid over- or under-pricing.
There are numerous ways to look at rate changes, each providing a different perspective of the magnitude of change and the implications these changes might have on future pricing decisions. One way is to measure the absolute increase in the rates, which indicates the highest increases and decreases in basis points, but does not reflect the value of the change relative to the base rate. Another way is to measure the relative value of the increase or decrease, but not necessarily the highest or lowest increase in basis points. Finally, you can measure rate changes by reflecting the highest and lowest end value, i.e., identify the states with the highest and lowest average rate at the end of December 2011.
On one side of the deposit-rate spectrum is Massachusetts, which dropped 35 basis points, from 0.81% in January to 0.46% in December of 2011. At the other extreme, the average rate for deposits in Alaska increased by nine basis points during 2011, from 0.35% in January to 0.44% in December. The absolute spectrum of rate changes is therefore 44 bps.
Completing the list of the leading five states with the greatest drop in rates during 2011, behind Massachusetts, are: Ohio down 34 bps; District of Colombia, 32 bps; Connecticut, 31 bps; and Rhode Island, 30 bps. The five states that exhibited the smallest drop in deposit rates after Alaska are: Kentucky, with a drop of 8 basis points; Nebraska, down 9 bps; Utah, 13 bps; and Maine, 14 bps.
When measuring the relative change in deposit-rate value by state, the picture is slightly different. Topping the list of the highest declines in deposit-rate value is South Carolina, which lost over half the value of its deposit rate in 2011 – down 52% from 0.58% in January to 0.28% in December. On the other side of the spectrum is, again, Alaska, which increased the relative value of its deposit rate by 27% – from 0.35% in January to 0.44% in December.
The remaining states in the top five with the greatest loss of deposit-rate value after South Carolina are: Ohio, with a 51% drop; District of Colombia, with a 49% drop; West Virginia, down 48%; and Connecticut, 45%. Conversely, states in the top five with the least loss of deposit-rate value after Alaska are: Nebraska, down 14%; Kentucky, 15%; Iowa, 19%; and Arizona, 20%.
At year end 2011, the following states offered the highest average rate on deposits: Iowa, 0.80%; Louisiana, 0.62%; Florida, 0.60%; Wisconsin, 0.60%; and California, 0.59%. The five states with the lowest average rate on deposits were: South Carolina, 0.28%; West Virginia, 0.32%; Montana, 0.32%; District of Colombia, 0.32%; and Ohio, 0.33%. For reference, the national average rate for deposits at year end stood at 0.58%.
Bottom line, deposit rates are dynamic, even in a low-rate environment, especially when the rates are subject to regional factors such as demographics, unemployment and supply and demand. Therefore, those bankers who practice regional rate optimization have the advantage of greater pricing precision, which translates into lower cost of funds.
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