Predicting Bank Deposits and Loans

Author(s): G. David Hughes

Source: Journal of Marketing Research, Vol. 7, No. 1 (Feb., 1970), pp. 95-100
Published by: Sage Publications, Inc.
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 G. DAVID HUGHES*

Models for determining optimal levels of advertising expenditures require an

equation that relates such expenditures to sales in the context of other marketing
efforts and the environment of the firm. Using three savings banks as an example,
this study demonstrated that the construction of this equation requires knowledge
of a bank's goals, planning horizon, and marketing strategy.

Predicting Bank Deposits and Loans

Because banks spend over one-quarter billion dollars while a bank with a long-range horizon will rely more
for advertising [13], their concern for optimal levels of on its own plan than the short-run behavior of com-
advertising expenditures is natural. The familiar ques- petitors. Thus, the planning horizon will determine the
tion, "How much should we spend for advertising?" importance of variables in models of prediction. Three
may be answered with operations research techniques planning horizons-intermediate, annual, and long-
if an objective function can be described. But this func-range-were examined.
tion requires a prediction of deposits and loans. This Models to predict deposits included two variables that
study attempted to identify the variables that should could be controlled by the banks (dividend rate and
be included in prediction models for three savings banks advertising expenditures) and three which could not
in Boston. For details, see [3]. (effective buying income per household, common stock
dividend rates, and earnings rates). Similarly, models
METHOD to predict loans used two controllable variables (interest
rates on loans and advertising expenditures) and three
A detailed case study revealed that quiteuncontrollable different ones (government bond rates, consumer
goals were used by one bank when developing its strat-
expenditures for durables, and effective buying income
egy: the dollar volume of deposits, the market share of
per household).1
deposits, the number of depositors, and the share of
depositors [2]. Equations reflecting each of these goals
were used to see if goals differed among 1the banks
Sources of data are as follows: advertising price index,
examined. Boston Globe (combined morning-evening daily flat rate) as
reported in the Editor and Publisher International Yearbook,
Banks can aggressively alter controllable variables 1947-1961; bank variables including dollar deposits, number
such as dividend rates, loan rates, and advertising, or of depositors, dollar loans, number of loans, value of premises,
identify a market segment and adapt to the needs of advertising expenditures, dividend and loan rates were taken
this segment. The strategy actually used will determinefrom The Commonwealth of Massachusetts, Division of Banks
which variables should be included in a prediction and Loan Agencies, Annual Reports of the Commissioners of
Banks, Section C for the years 1946 to 1962; "Consumer Price
model. Since the case study did not reveal a clear strat- Index, Boston, Massachusetts, All Items, 1947 Forward," Series
egy, the most likely variables were included in the A-11, U. S. Department of Labor, Bureau of Labor Statistics,
equations in an attempt to identify strategy or lack of Washington, D. C.; Earnings-Price Percentage (E/P) was com-
strategy. puted from Moody's price per share of industrial stocks. Their
earnings per share at the annual rate and government bond
A bank with a short planning horizon will react yields (U.S. taxable, 3-5 years), were from U. S. Office of
quickly to competitive advertising and dividend rates Business Economics, Business Statistics, A Supplement to the
Survey of Current Business, 1965, Washington: U. S. Govern-
* G. David Hughes is Associate Professor of Marketing, ment Printing Office, 1965, 107-8, 91; expenditures for durables
Graduate School of Business and Public Administration, Cornell per capita, U. S. Department of Commerce, Office of Business
University. Support for this study was provided by the Center Economics, The National Income and Product Accounts of the
for Research in Management Science and the Ford Foundation United States, 1929-1965, Washington: U. S. Government Print-
Program in Marketing Research, University of California, ing Office, 1966, 48-9; population, households, and effective
Berkeley. buying income were taken from the annual "Survey of Buying
Power," Sales Management (1947-1961).
95

Journal of Marketing Research,

Vol. VII (February 1970), 95-100

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96 JOURNAL OF MARKETING RESEARCH, FEBRUARY 1970

OBSERVED DEPOSITS, ALL BOSTON SAVINGS BANKS

Deposits ($000,000)
2,100

1,900

1,700

1,500

1,300-

, 100 -

900-

0 200 400 600 800 1,000 1,200 1,400 (Points)

E/P = DMg

Variables took three forms-absolute, first

sensitive, depositing in difference,
his savings account according to
and lagged. The first model used absolute
the spread variables
between the bank in
dividend rate (Divj) andathe
hyperbolic form to examine earnings-price
the relationship between
ratio of common stocks (E/P). In the
the earnings-price ratio of model,
common stocks, savings
banks' dividend rates, and dollar volume of deposits
(Figure). The second model used the Deposits
first = a+b differences
[1/(E/P - Divj)], of
variables to examine the relationships between the in-
the volume of desposits
dependent variables of advertising insensitive to the stock market
expenditures, com- is
representedcommon
mon stock dividend-price ratios, by the constant a, which
stock is the horizontal
earn-
asymptote in
ings-price ratio, bank dividend the Figure. The
rates, and influence of the stock
effective
market is represented
buying income, and the dependent by the coefficient
variables of b, the slope of
savings
deposits, expressed as dollarthe volume, number
curve. This slope performs an important roleof ac-
in de-
counts, and the market share termining
of each if savings (Table
bank dividend1). rates The
should be
market for share calculations was defined as all Boston altered. If the spread (E/P - Divj) is less than 300
savings banks. Each of these dependent variables repre-points (Figure), a slight increase in savings bank dividend
sented a possible savings bank promotional goal. The rates will increase dollar deposits substantially. If the
third model (Table 2) used the same variables as the spread is 700 points or more, even a large increase in
second, but in the lagged form [4]. The fourth model dividend rates will have little effect on deposits in sav-
used the lagged variables to identify the determinants ings banks.
of demand for loans by savings banks (Table 3). Coefficients of elasticity were computed for each of
the savings banks using the hyperbolic model. There
FINDINGS was little difference among banks-.27, .37, and .32.
To determine if these coefficients were unique to Boston
Hyperbolic (Absolute) Model
they were computed for all savings banks in New York
It was hypothesized that there would be two State,types ofa large savings bank in New York City
including
savings bank depositors. One would be insensitive to the and a small bank in upstate New
and a medium-sized
activities of the stock market and the second would be York. The results were .39, .30, .35, and .40 respec-

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 PREDICTING BANK DEPOSITS AND LOANS 97

tively. Thus, the model not produce seems to

an effect until the be
following applica
period and may
than the Boston banks. continue to produce decreasing effects through sub-
The hyperbolic model fits the data well (r2adj. = .83) sequent periods. The Koyck [4] model for lagged vari-
but the Durbin-Watson statistic (d) revealed positive ables was used to reflect the cumulative effect of bank
serial correlation in the residuals, which was to be ex- promotional effort.
pected in time-series data. One technique for reducing
serial correlation is the transformation of data into Koyck Model of Lagged Variables
first differences before fitting regressions. This trans- Several researchers have applied the Koyck model to
formation was consistent with savings bank marketing the relationship between advertising and sales. Nerlove
goals, defined frequently in terms of annual changes [6] in
explored the relationship for agricultural com-
deposits [2]. modities, Palda [7] for a proprietary drug, and Lambin
[5] for a consumer nondurable. The present study seems
First-Difference Model
to be unique in its application of the model to a con-
Equations which were significant using the first- sumer service.
difference model are summarized in Table 1. The find- Original plans called for converting all dollar deposits
ings suggest that when the promotional goals of these to real dollars with the aid of the Consumer Price Index.
banks are defined in terms of annual changes in dollar It was doubtful, however, that this would represent the
volume of deposits, number of accounts, or share ofdecision process of the saver who, with inflated dollars,
each, the determinants of deposits (the influence of the was choosing between a savings bank and the stock
stock market and effective buying income per household) market. The structural relationship between dividend
are beyond the control of the bank. The one exception rates and dollar deposits might be damaged by deflation.
is the case of Bank B, where advertising expenditures The final choice was detemined pragmatically: the rele-
were associated with the share of dollar deposits. Thisvant
is equations were fitted with and without deflating
the role that advertising is expected to play when prod- deposits. In every case, more variance was explained
ucts or services are homogeneous, which is the case with without the CPI than with it. Therefore, deposits were
savings banks. The fact that only Bank C's market share not deflated when fitting the regressions reported in the
was sensitive to annual changes in income suggests that tables, nor was effective buying income per household.
this bank may be using a strategy of market segmen- Other dollar values, advertising expenditures and
tation by directing its promotional effort to those seg- durable goods expenditures per capita were deflated by
ments with increasing income. appropriate indices so that deposits were related to units
Defining the goal of marketing efforts in terms of first
of advertising or durable goods.
differences ignores the many economic stimuli that do Another transfomation was use of the logarithm of

Table 1
FIRST DIFFERENCE MODEL: DEPOSITS (n = 14)

Dividends (D), Price (P), Positive

Earnings (E) on NYSE Serial
A Advertising (points) A Effective Correla-
Constant Expendituresa Buying R2 b tion in
($000) 1 1 Hncome Residuals
P - Div Household (Durbi-DiviWatson)
D/P- Div /E/P - Divi Watson)

All Boston Savings Banks

a Deposits ($000) 5.31 X 104 2.58 X 107 e .525 Yes
a Deposits (No.) -1.54 X 103 1.43 X 107 d .346 No
Bank A
a Deposits ($000) 8.95 X 103 6.12 X 106 c .568 Yes
a Share Deposits (No.) -.002 --1.57c .336 ?
Bank B
A Deposits ($000) 4.85 X 103 2.82 X 106 c .633 Yes
A Deposits (No.) 1.80 X 103 2.36 X 104 d .371 No
A Share Deposits ($000) 5.80 X 10-4 5.72 X 10-5 d .311 ?
Bank C
a Deposits ($000) 1.10 X 104 5.89 X 106 C .460 No
a Deposits (No.) 1.09 X 103 1.32 X 106 d .208 ?
a Share Deposits ($000) 8.11 X 10-5 1.24 X 10-3 d 8.55 X 10-6 c .577 ?
a Share Deposits (No.) -9.17 X 10-6 1.07 X 10-3 d -1.30d 1.16 X 10-5 0 .648 No

a Constant dollars. b Adjusted. C Significant at .01 level. d Significant at .05 level.

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 98 JOURNAL OF MARKETING RESEARCH, FEBRUARY 1970

Table 2
KOYCK MODEL OF LAGGED VARIABLES: DEPOSITS (n = 14)

Dividends (D), Price (P), Positive

Earnings (E) on NYSE Serial

Constant
Constant
Deposits log (points) EB
(t - Buying R2 b
) Advertisinga tionRius
Income in
(log $000) DiuehE/P Residuals
1 1 Household $ (Durbin-
D/P - Divi E/P - Divi Watson)

All Boston Savings

Banks

Deposits ($000) -4.15 X 105 .90c 1.02 X 105 d 1.34 X 107 d .996 No
Deposits (No.) 2.39 X 105 .65c 1.07 X 107 c .820 No
Bank A
Deposits ($000) -4.10 X 104 1.22c 9.94 X 104 d .991 ?
Deposits (No.) 3.91 X 104 .72c .649 No
Share Deposits .03 .86c .929 Yes
($000)
Share Deposits .04 .79c -1.05d .938 ?
(No.)
Bank B
Deposits ($000) -1.38 X 104 .97c 5.67 X 103 d 3.32 X 104 d 1.27 X 106c .997 ?
Deposits (No.) --2.07 X 104 .76c 3.27 X 104 d 5.33e .955 No
Share Deposits .02 .61c 4.06 X 10-3 c .958 ?
($000)
Share Deposits .01 .86c .904 No
(No.)
Bank C
Deposits ($000) -1.95 X 104 1.16C .987 No
Deposits (No.) -1.69 X 104 1.13c 1.49 X 103 c .969 No
Share Deposits .12 - .002c .002c 1.08 X 10-s C .963 No
($000)
Share Deposits .10 6.87 X 10-6 c .914 No
(No.)

a Constant dollars. b Adjusted. c Significant at .01 level. d Significant at .05 level. e Significant at .07 level.

advertising expenditures in the Koyck model. This form Five of the 14 equations had significant coefficients
reflects the diminishing returns of advertising, an effect
for the advertising variable, but only two of these coeffi-
noted by many researchers. There is no general agree- cients were in equations of market share, as oligopoly
ment that advertising is subject to diminishing returns. theory would predict. Futhermore, the advertising coeffi-
See, for example, Simon [9]. cient for the share of dollar deposits for Bank C was
The Koyck model for deposits, summarized in Tableminus instead of plus. It would appear that, in the long
2, was superior to the first difference model. There wererun, advertising is not conforming to the role of de-
significant coefficients for each of the four promotionaltermining only market share. The fact that three coeffi-
goals, R2 increased, and the number of coefficients with cients were associated with the dollar volume or number
positive serial correlation declined. But most of this im-
of deposits suggests that advertising does expand the de-
provement was because of the lagged variable (De-mand for savings.
positstl). Ten of the 12 lagged variables accounted for
Koyck Model for Loans
90% or more of the variance.
The yield on government bonds was introduced be-
This variable has been interpreted by Palda as the
cause the savings banker may invest in bonds instead of
cumulative effect of previous promotional effort [7, p.
18]. Since the coefficient of the lagged variables reflects
mortgages. To reflect the competition among savings
bankers for mortgage loans, a variable was introduced
the annual cumulative effect of past promotional effort
that measured the spread between a bank's loan rate and
and environment, the annual rate of decay will be one
the lowest loan rate among Boston savings banks. Ex-
minus this coefficient [10, p. 481]. For example, all
penditures for durable goods were used as a proxy vari-
Boston savings banks had a decay rate of .10 per year
able for the need for a loan because loans are frequently
(1.00 - .90) for volume of dollar deposits. Banks Amade for such purchases. Because of a change in the
and C, in contrast, were fortunate to have growth ratesCommissioner's Annual Report for Savings Banks, the
of .22 and .16, respectively.
annual loan rate was available for only seven years.

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 PREDICTING BANK DEPOSITS AND LOANS 99

Table 3
KOYCK MODEL OF LAGGED VARIABLES: REAL ESTATE LOANS (n = 7)

Expendi- Positive
tures Effective Serial

Loan log ri - r, ri - GBY for Bu

Consta (t - 1) Adv (points) (points) Durables Income/ R2 b tion in
(log $000) per Household Residuals
Capilaa (8) (Durbin-
($) Watson)
Bank A

Loans ($000) 1.47 X 10 --1.02 X 104 .949 No

Loans
Share(No.) -2.42
LoansX 104 --556.11d
- .14 86.56c
.002 4.15d .980 No
.762 ?
(No.)
Bank B
Loans ($000) -2.91 X 104 .730c 6059.29c 127.91C .999 No
Loans (No.) --2.86 X 10* .793c 22.49C .985 No
Share Loans .004 .51c 1.49 X 10-4 d .924 No
($000)
Share Loans .03 .65c .912 No
(No.)
Bank C
Loans ($000) -1.09 X 105 .99C 22.30d .983 No
Loans (No.) 179.64 1.29C .963 No
Share Loans .007 1.09C .856 No
($000)
Share Loans - .002 1.22c .920 No
(No.)

a Constant dollars. b Adjusted. 0 Significant at .01 level. d Significant at .05 level.

The findings for the loan model are summarized in adapted its marketing strategy to that market segment
Table 3. From 83 to 97% of the variance was explained with increasing income.
by the lagged variable, loan (t - 1), for Banks B and C. If the planning horizon is longer than one year, so
The demand for loans from Bank A was influenced most that the cumulative effect of previous effort is con-
strongly by the spread between its rate and the lowestsidered, most of the variance is associated with the
rate in Boston (r, - rl). Advertising performed an impor- lagged variable, but the number of cases where advertis-
tant role in determining the dollar volume of loans foring is an important variable increases. Thus, the effect
Bank B. Bank C, with a loan rate equal to the lowest inof advertising seems to emerge only when the cumulative
Boston, was relatively uninfluenced by these variables,determinants of demand have been removed. If we use
with the exception of the influence of income when the the best fitting equation to identify the long-range
goal is defined in terms of dollar volume of loans. strategy of each bank it appears that each bank is
concerned with maximizing its dollar deposits in the
DISCUSSION long run. The short-run strategy of Bank C may just be
a means toward this long-range end.
Goals and Planning Horizons Negative advertising coefficients that are highly sig-
nificant are most perplexing. The negative sign associ-
The influence of the several variables examined de- ated with the share of deposits of Bank C is an example.
pended on the marketing goals (absolute or share of Since the advertising of Bank C was not objectionable, it
dollar deposits or number of accounts), the marketing is unlikely that people avoided the bank because of its
strategies, and the planning horizon (annual changesadvertising.
or Several other hypotheses are worth noting.
cumulative effects). When the planning horizon included A negative advertising coefficient could result if ex-
only annual changes (Table 1), the uncontrollable vari-
penditures did not keep pace with increased advertising
ables were the most influential. If we assume that the
costs so that real units of advertising declined. This
equation with the best fit for each bank (highest R2)effect did occur with Bank C for two of the 14 obser-
represents its goal, it appears that the three banks vations.
did
not have the same short-range marketing goals. BanksAdvertising has a dual role. It is used to increase or
A and B attempted to maximize dollar deposits (R2 to = stop a decline in deposits. In the second role, adver-
.568 and .633 respectively) while Bank C focused tising
on expenditures might have been increased after
share of the number of deposits (.648). Perhaps Bank Bank
C C's share of the dollar deposits declined. This

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100 JOURNAL OF MARKETING RESEARCH, FEBRUARY 1970

only 6%
relationship would yield a negative between
sign. In 1950
six and
of 1960,
the the
14 composition
years, Bank C lost market share. changed
Thus, considerably.
the negativeFor example,
sign the high-saving
group ofstrategy
suggests that Bank C's advertising professionals increased
was both by 42% [11]. The lack
offensive and defensive. In theoflatter
annual data for these
case, variables precluded
deposits de- their use.
A thirdversa.
termine advertising rather than vice limitation is the assumption that advertising ex-
None of the absolute loan activity (Table
penditures represent 3) was
advertising effectiveness, which is
associated with the yield on U.not
S.necessarily
government the case. A small,
bonds. well-written ad can
be more
Perhaps the lack of a relationship iseffective than an expensive,
explained by thepoorly-designed
fact that these bonds carried rates that were 148 to 245 one. Some media are more effective than others. But the
points lower than the lowest loan rate, which was toolack of data required this simplifying assumption.
much to pay for security and liquidity. In 1967, quality
corporate bonds were purchased by many savings banks CONCLUSION
because of their high yields, liquidity, and ease of ad-
ministration. According to one banker, the yield of a Models for the optimization of advertising ex
mortgage must be 75 points higher than a corporate tures require a prediction model that will relate co
bond to justify the servicing expense of the former [1]. lable and uncontrollable variables to that variable
The long-range goal of the three banks with regard to which reflects the marketing goal of the firm. Using three
loans seems to be maximizing the dollar volume ofsavings banks as an example, it was demonstrated that
loans. The strategies for reaching this goal vary amongmodels for the prediction of demand must reflect the
banks. Bank A loans were identified with the short-run firm's goals, planning horizon, and marketing strategy
spread in loan rates, while loans for Banks B and CWhen these are unknown, which is probably the general
seemed to be determined by long-run cumulative effects.case, regression techniques such as those described here
may help to identify the implicit goals, horizons, and
Strategies strategies of the firm in question as well as those of its
competitors.
The most prevalent short-run strategy for attracting
deposits was adapting dividend rates to the earnings-
price ratio of common stocks on the market, for which REFERENCES
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goal was maximizing the share of the number of deposi-1. "Bond Men Sweep Out the Shop," Business Week,
1967), 93-4.
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the bank's dividend rate to the dividend-price ratio ofEvaluating Advertising Strategy," Boston: Graduate School
common stocks and identification with that market of Business, Harvard University, Inter-collegiate Case Clear-
segment that had increasing income. ing House 9M54, 1964.
The long-run strategies were more complicated 3.de- , "The Marketing Systems of Three Savings Banks,"
Research Program in Marketing, No. 32., Institute of Busi-
spite the fact that the three banks seemed to share the ness and Economic Research, University of California,
long-range goal of maximizing dollar deposits. The Berkeley, California, October, 1967. (Mimeographed.)
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tising performed the dual role of increasing the absoluteAmsterdam: North-Holland Publishing Co., 1954.
5. Jean-Jacques Lambin, Investissements Publicitaire et Etude
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