The economic uncertainty that defined 2022 has carried over into 2023—recession talks loom, interest rates are rising, and Silicon Valley Bank’s recent fallout has again muddied the waters on what comes next for banks. As financial institutions determine their strategies for navigating the new year, West Monroe partnered with American Banker to ask leaders in commercial, retail, and private banking how they’re approaching their loan and deposit products and portfolios in response to ongoing financial pressures in the U.S. economy.
The good news? There’s little panic. Banks aren’t planning to freeze initiatives to ride out the unclear landscape. There’s a great opportunity to prioritize and make smart shifts while still investing for the long term.
Our survey found that while banks are adjusting and taking historical recession-ready actions, these actions aren’t the sole priority—banks continue to invest in and maneuver around risks in other areas.
This survey, conducted in Q4 2022 with an outlook toward the new year, found that banks are in the initial stages of determining the right balance between battening down the hatches in an uncertain economic environment and taking the offense to continue growing and remain competitive.
Most banks feel the trends of 2022 will continue through Q2 2023, with 69% tightening their loan portfolios—and those banks expecting their loan-to-deposit ratio to increase through the first half of the year. That said, 33% of banks noted they’re not tightening their loan portfolio—showing that some institutions are running with a greater risk tolerance and are making changes or investments elsewhere.
Just 30% of banks are highly concerned about decreased demand for consumer loans this year, indicating that it’s on the radar but not heavily impacting decision-making.
When the market is uncertain, companies need to double down on what makes them different and valuable to their customers. Shifting demands for consumer deposits as interest rates increase creates a window to better meet consumers where they are.
For banks considering an offensive approach, this shows room for continued emphasis on building loyalty and establishing an enhanced value proposition to prevent fintechs and disruptors from gaining greater market share.
Despite a rocky environment, it also presents opportunities for making strategic moves. Companies that continue to carve out budget and time for strategic investments during a downturn—specifically those geared toward digital innovation—are better positioned to weather the storm and come out on top. While loan ratios and increasing interest rates are rocking the boat, working with and through the environment will help organizations differentiate and demonstrate their strength.
With shifts in deposit volume a looming concern going into 2023, 60% of banks are looking to target high-quality consumers with higher interest rate offerings on savings products. The value of digital banking continues to reign, with the largest banks dedicating more budget to gaining deposit accounts.
Central to improving deposit capture is simplifying the customer onboarding experience, leveraging enhanced digital solutions that reduce onboarding friction and increase satisfaction. Existing West Monroe data shows that digitally focused banks have an 8% better efficiency ratio, lower costs, and are better positioned to retain their current customers and experience growth.
The banks tightening (or expecting to tighten) their loan portfolios are more likely to be taking additional steps to reduce risk exposure in their loan business—38% of banks reported reducing credit lines and adjusting credit requirements for new loans. When balancing near-term risk and long-term strategy, it’s vital to avoid falling behind peers and the digital banking options available to consumers.
Banks are taking steps to shift their investments this year. While they don’t anticipate dramatic changes, there’s a perceived need for precaution and making a positive impact on revenue through different avenues. On average, organizations are investing most in these areas:
With those heavier priorities at the top of the balance sheet, there’s still about half of the budget to flex toward longer-term strategic moves such as exploring inorganic growth and increasing revenue from non-interest sources of income. These can tie into unique value-adds and digital-forward investments like apps, banking-as-a-service, embedded finance, and targeted audience segmentation.
Our research also found that a majority of banks are following a more traditional defensive path. With today’s outlook and a looming market correction, many are taking similar steps to weather-proof their strategy to make it through the storm of uncertainty. We found:
Those who are already tightening their loan portfolios are more concerned about the following challenges than banks on the offensive:
These trends show there’s room to run—and weaving in digital improvements from a products and services standpoint can help organizations across operations, customer experience, and compliance. By striking a balance between making thoughtful shifts and strategic investments with a long-term mindset, organizations will benefit from shifting to offense despite market uncertainty.
Banks aren’t sitting still as they take actions toward securing higher-quality loans and protecting their loan to deposit ratios—while keeping a close eye on deposits and preventing loan defaults. These historically common approaches have some merit to them, but as the year progresses and uncertainty continues, making the shift from defense to offense and making strategic investments on long-term growth is critical as digital continues to reign supreme.
Seeking partnerships and other forms of revenue now will establish pipelines that will remain viable as the market stabilizes, bringing additional funds into your organization for even greater returns over time.
Being intentional with near-term and longer-term priorities—and taking informed risks—can provide a bedrock for 2023 and beyond while building strength and loyalty that will differentiate against industry peers.
This research was conducted by Arizent and American Banker on behalf of West Monroe. This research was conducted online during December 2022 among 113 qualified respondents. To qualify, respondents had to be in a director level position or higher with responsibility in corporate/commercial, retail, or private banking at banks or credit unions with more than $1 billion in assets. This was a blind data collection effort; West Monroe was not identified as a sponsor of the research.