Americans seem ready to unload their pent-up savings… If the circumstances are right.
Deposits grew twice as fast as loans in 2020 compared to the median growth of the three years prior. The growth rates for both deposits and loans were significantly higher than the preceding three years.
The rate of deposit growth at banks and credit unions is nearly two times higher than it was in the past four years.
Putting the river of deposits to work
Community financial institutions need fresh channels for growth.
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The Kasasa advantage: Kasasa partners outperformed peers
Monitoring industry trends to make better strategic decisions: Growing in a flooded market
The flow of deposits slowed for banks and rose for credit unions. Deposits are still coming in much faster than they can be redeployed.
This is due to consumers pulling their money out of the stock market, the stimulus package, and an overall reduction in consumer spending.
Total deposits for the first half of 2020 grew at 22.3%, up 6x compared to the previous three years. Loans grew at 14.9% or triple that of the previous three years. That’s a tremendous increase!
1. Cheap deposits
2. Where consumers are headed
3. The Kasasa advantage
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Consumer credit card usage has stayed very low year-over-year but seems to be turning the corner.
Despite regional news headlines proclaiming a bubble in the housing market, the growth rate for mortgages shrank for banks and only grew 6.4% for credit unions.
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The growth rate for agriculture, home equity, and credit cards fell.
Banks’ role in the pandemic recovery is restoring public trust to pre-financial crisis levels.
Point-of-sale swipes are on the rise with younger generations.
After the stimulus, savings balances are up across the board.
Kasasa’s mission is to partner with locally owned financial institutions, who in turn help consumers and their communities. Our clients depend on us for accurate, strategic insights to help them perform so highly (it’s a mutual admiration society).
Source: FDIC and NCUA Call Reports; represents aggregate results of all financial institutions.
* Quarterly growth rates are annualized.
Source: FDIC and NCUA Call Reports; represents aggregate results of all financial institutions.
* Quarterly growth rates are annualized.
Source: FDIC and NCUA Call Reports; represents aggregate results of all financial institutions.
* Quarterly growth rates are annualized.
Source: Gallup. * Percentages represent top two-box responses: “Great deal” and “Quite a lot” of trust.
Source: Kasasa Analytics 2021
Kasasa partners outperformed peers in NIM and generate a greater share of revenue from non-interest income.
The pandemic put the brakes on consumer spending in March and April of 2020; fast forward to today and point-of-sale (POS) swipes for most generational cohorts are higher than they were pre-pandemic.
This is a strong indicator for economic activity and consumer confidence.
Millennials are buying more than their share of houses.
1. Source: National Association of Realtors, 2021 Home Buyers and Sellers Generational Trends Report.
2. ICE Mortgage Technology Millennial Tracker, March 2021.
The big winners in the Paycheck Protection Program (PPP) were banks larger than $1B in assets and credit unions larger than $500M in assets.
From a short-term cost-of-funds (COF) perspective, community financial institutions are positioned well, with lots of deposits sitting in non-interest-bearing accounts.
The Kasasa model is based on establishing deep relationships with highly engaged consumers.
Growth in auto, commercial real estate, commercial, and PPP lending helped, but has left a lot of room for improvement.
Looking farther out, community financial institutions face a risk of deposit flight. As consumer confidence grows, money could shift back toward other vehicles such as the stock market.
Many institutions are caught between the threat of cheap deposits leaving and a strong need for loans. The fear may hold back efforts to acquire new borrowers.
Loan-to-deposit ratios are down and credit card growth declined. Lending for auto, commercial real estate, small business, and commercial failed to fill the gap.
Marketing budgets are starting to rebound as large institutions compete for consumer attention.
Cheap deposits are a small blessing with a dark threat: deposit flight when things go "back to normal".
This report only includes data who spend more than 7% of their expenses on marketing and are required to report it.
Deposit growth began to slow for banks and credit unions in 2021.
This growth is unlike anything seen by community financial institutions in history.
While it has prevented a liquidity or credit crisis, it has also presented institutions with an unprecedented challenge.
Source: FDIC and NCUA Call Reports; represents aggregate results of all financial institutions.
Borrowers aren’t coming out of the woodwork to help institutions redeploy their historically high liquidity.
Net interest margins remain compressed with little relief in sight.
Many institutions feel as though they’re managing an “un-balanced” sheet and are looking for solutions.
Lots of deposits and less loan demand means liquidity is way up.
Thanks to a decade of persistent low rates following the financial crisis in 2007, community financial institutions have some sense for how to respond to the low rates of the COVID pandemic.
Institutions will seek to return to pre-pandemic efficiency rates to combat falling margins.
Cost of Funds is low, which is good news. Now institutions need to shift their focus to creating additional revenue streams, increasing non-interest income, and acquiring more account holders.
Slender margins put the focus on increased consumer acquisition and other revenue sources.
Source: FDIC & NCUA Call Reports; represents aggregate results of all financial institutions. NIM represents net interest income as a percent of average earning assets. *Quarterly results are annualized.
Mid-to-large community financial institutions are starting to beef up their marketing budgets.
New deposits are incurring close to zero interest expense.
Community financial institutions have not unlocked the next solution to lending growth, or certainly not at the levels of growth they need.
Marketing spends for financial institutions are growing again. Now is the time to make bold marketing moves and get noticed by consumers.
Takeaways
Takeaways for financial institutions
Consumer wealth is way up. Economic activity could jump too.
Falling unemployment should boost confidence in the economy.
Consumer confidence in banks has risen sharply compared to pre-pandemic levels.
Subsequent COVID spikes threaten economic growth.
Younger generations are more averse to debt than their elders.
On the other hand:
Source: FDIC and NCUA Call Reports; represents longitudinal study of all financial institutions reporting positive marketing expenses (>$0) from Q4 2017 to Q2 2021. *Quarterly growth rates are annualized.
**https://www.emarketer.com/content/us-digital-ad-spending-by-industry-2021
Consumer confidence in banks has been climbing since hitting a low after the sub-prime mortgage crisis.
While confidence in most institutions is lower than in 2000, banks saw a precipitous drop, largely due to megabank malfeasance.
The rebound likely bodes well for community financial institutions who saw their reputations hurt by megabanks but continued to serve their communities faithfully.
Consumers are padding their savings accounts with stimulus money.
Gen Y increased their savings by 44% compared to February of 2020.
This should also bolster consumer confidence and lead to renewed spending.
Millennials make up the largest share of home buyers since 2014.
Millennials are also buying more homes than other generational cohorts, commanding 51% of total mortgage purchases. (ICE Mortgage Technology Millennial Tracker, March 2021).
The largest 10-year population cohort (ages 25 to 34 – a subset of Millennials) in the U.S. is entering their prime credit-building years.
There is a growing opportunity to help younger borrowers establish strong credit and lending behaviors.
The strategies that worked with Boomers and Gen X, such as credit cards and home equity, are unlikely to attract Millennials and Gen Z, who are saddled with student loans and
a dislike for debt in general.
Despite a slight contraction in national home-buying, Millennials are entering the home-buying market in a big way.
Takeaways
Institutions offering Kasasa reported better than average performance across nearly every significant metric, including loans, return on equity, net interest margin, and non-interest income.
Not all consumer deposits are created equal, even more so when you understand the lifetime value of consumers who engage with multiple products. Highly engaged consumers become your hedge against an unpredictable economy.
Attracting, engaging, and retaining these consumers is central to the Kasasa strategy.
Kasasa banks have signaled strength and stability during the pandemic.
Kasasa credit unions are among the most financially fit in the nation.
Source: FDIC as of Q1 2021 annualized data. Represents median results of all FDIC banks and Kasasa banking clients with at least one product.
Source: NCUA as of Q1 2021 annualized data. Represents median results of all NCUA credit unions and Kasasa credit union clients with at least one product.
Takeaways for financial institutions
Tailwinds
Headwinds
Unemployment was 5.8% in May and is forecasted to be 4.5% at year-end.
Falling unemployment
Growing economy
The economy grew 6.1% in Q1 and is forecasted to grow 7.0% this year.
Household wealth
Household net worth is up 23% since Q1 2020 (+$26 trillion).
Employment deficit
Total employment remains down 7.6 million from the February 2020 peak.
Sluggish spending
Personal consumption was flat in May; retail sales fell 1.3%; revolving credit down 2.4%.
Inflation concerns
Core PCE inflation grew 3.4% in May and is forecasted to end the year up 3.0%.
COVID spikes
For many cities, COVID is making its third wave to hit communities.
Some financial institutions may still be hesitant to increase marketing spends, but there’s never been a better time.
Major financial service providers grew their ad spend by 23.3% in 2021 compared to 2020 spends**, while smaller institutions held back. Financial services advertising is the second largest category after retail.
Auto makers and other industries pulled back on their advertising in 2020**, and haven’t returned to normal spending levels, leaving a huge opportunity for marketers to get noticed and attract new consumers..
Source: Kasasa Analytics 2021
Source: FDIC and NCUA Call Reports; represents longitudinal study of all financial institutions reporting positive marketing expenses (>$0) from Q4 2017 to Q2 2021. *Quarterly growth rates are annualized.