- Should we focus on the Fed Funds rate as we get closer to another decision or is the fed balance sheet more impactful to the growth of the economy?
- What is more important, the bank across the street’s rates or the rate your customer is anchored on?
- How should your bank be thinking about pricing in our ongoing new normal of a compressed yield curve?
The Fed: Rates V. Balance Sheet
Last year we were hyper-focused on rates. See my past articles digging into what factors were important and which were just smoke screen talking points on how rates impact bank profitability and what we can do about it.In this article we are going to dig in a different direction. We will dissect the growth of the market over the past six months while it has been on fire. Does anyone remember last summer when all anyone could talk about was a pending recession and now, we are at all-time highs?
Should we thank low rates? Should we thank “progress” with China trade talks? Let’s thank the fed balance sheet and the “non-QE,” quantitative easing that has been going on in the background helping propel the economy forward and thus bank earnings as well. With Chase, Citi and BofA knocking it out of the park this quarter, we as an industry have learned how to make money in the new normal.
Note here the correlation between the growth of the stock market, represented by the DOW in purple above, and the Fed’s total US balance sheet (Blue) and Reserve easing (Orange). Over the last 6 months the Fed has grown its total US assets held on its balance sheet by 8.97%. Over that same time period the Dow has grown by 6.11%, note on the graph they have increased almost in lockstep with each other.
We should be more concerned as an industry with a potential slowing or reversal of the Fed growing their balance sheet, and less focused on minor tweaks to the Fed Funds rate.
For a point of comparison, the green line is the change in Fed Funds rate. While it has been somewhat inversely correlated with the growth of the market, it does not look to be as much of an economic driver as the Fed’s balance sheet.
Your rates? Your peer’s rates? Or where the customer is Anchored?
Focusing specifically on mortgage and having spent the last six months talking to a wide array of both banks and non-bank mortgage lenders, one interesting comment has stayed with me. One regional business exec commented that he did not care about the rates out there in the market, he only cared about the rates of the other four banks that he considered the most like his bank.
I challenge this assertion for a few reasons. Number 1, you need to look at pricing how your customers look at pricing. What do they think of your rates? What rates are they seeing, getting email and snail mail about? What rates are they seeing on BankRate or Zillow? Does it matter that some of those rates are so aggressive you could never compete on price? Do your customers know your cost basis is higher than those online firms? Do they care?
And additionally, we know that customer bank at more than one financial institution for a variety of reasons. Maybe they have a large national and regional, or a super-regional and a community bank for different reasons as all different size banks have different core advantages. Service, size, international services, knowing your name, all of these are different and fantastic things to offer.
But the four banks most like you? The four banks in exactly the same states as you offering the exact same products with likely staff and loan officers that have jumped around between all of you? With so few differences do you really think your customers are just comparing these two or three banks as they are identical and are forgetting about the rest? Your dedicated loyal customer that you want to deepen your relationship with are likely not also customers of those other banks exactly like you.
What they are actually doing is leveraging the 10+Million you just spent on a new point of sale system to pop them a rate online at 3 in the morning and then comparing that rate to the local credit union or to a massive national player they bank with, or even more likely just popping open BankRate or LendingTree and seeing if you are in the ball park. Do they care that the number one lender they see in Zillow is only going to offer 4 loans at that price today and then disappear from the rate table? No, they care that they see your price is $1500. Do you have $1500 of brand equity with that customer to offset the difference? Maybe you do, maybe you don’t. What if you take into account all of the noise that your core customers are getting bombarded with and price to a spread above while incorporating your brand equity? This is a more thoughtful and accurate way for you to price than just looking at your 4 peers.
I challenge the industry to think about market intel differently. As you invest in pushing your customers online don’t be blind to the extra noise and ease of shopping around that comes with that option. Now they can come into your branch and shop online while sitting there talking to your loan officers.
Know your spread compared to those players online and be able to sell the price difference and value of your firm. This is the future of the industry and if your sales force can’t sell against the pricing intelligence that is so readily available to your customers they are going to have trouble helping you grow your balance sheet and hitting your forecast.
With a compressed yield curve, you need every extra basis point in margin you can get without losing volume. You need to know not just your market, but the whole market so you can deepen your relationship with your core customers while also growing with new customers strategically and in the right pricing cells.
Want to discuss further or looking for ways to get that market-wide insight? Stop by and see me at booth #9 at IMB2020 in New Orleans.