Core versus Volatile Deposits

There are two basic deposit types that banks accept from their customers. These
are stable (core) deposits and non-stable (volatile) deposits by nature.

Stable (Core Deposits)

Core deposits have been historically recognized as “stable, less costly deposits
obtained from local customers that maintain a relationship with the institution”
(FIC, 2011), and it is modeled as the permanent balance representing long-term
deposit trend. Convenient branch locations, superior customer service, extensive
ATM networks, low or no fee accounts and types of depositors (retail, commercial,
municipalities, etc.) are some of the factors that contribute to stability of deposits1.
This type of deposit offers many advantages to banks, such as predictable costs
and less vulnerable to changes in short-term interest rates than certificate of
deposit.

Volatile Deposits

Volatile deposits include deposits that are not core deposits. This type of deposit is
considered as “overnight money and serves as „buffer‟ for volume fluctuations”
(Cipu & Udriste, 2009). They are more interest-rate sensitive. Due to this, in some
cases, a bank may not want to extend long term loans against these types of
deposits.

However, deposits identified as stable during good economic conditions may not be
reliable funding sources during stress events. Therefore, the bank should identify
deposit accounts likely to be unstable in times of stress and appropriately reflect
such deposits in its liquidity stress testing.

Major Findings

1
https://www.fdic.gov/regulations/safety/manual/section6-1.pdf
The key findings from the trend and volatility analyses of CBE and the banking
industry are summarized as follows:

o The average growth rates of most deposit types of CBE were moderately lower
than that of respective private banks during 2001 - 2017. However, deposit
growth rates of CBE followed a different trajectory since the start of 2010/11
FY. The bank registered higher average growth rates on total, saving and time
deposits, while registering almost similar average growth rate in demand
deposit compared to private banks since 2010/11 FY (GTP I).

o The volatility of CBE‟s total deposit has exceeded that of industry and private
banks mainly resulting from the large volatility of its time deposits.

o The CBE‟s saving and demand deposits have been slightly less volatile than
respective private banks, but remained more volatile than average industry. In
contrast, the CBE„s time deposit remained the most volatile among all deposit
categories of CBE, aggregate private banks and average industry.

o The volatilities of CBE‟s all deposit types (saving, demand and total deposits)
have been steadily increasing since 2001, reaching their peaks during GTP1
period and dropping then after. CBE‟s deposit was more stable during he first
2 years of GTP2.

o The rapid growth performances of incremental deposits of CBE represent the

primacy of the Bank‟s strategy of expanding customer base and branches. This
has led to large deposit growth variations and the gradual attainment of more
stability than the respective private banks as observed recently.

o Despite large occasional drops, the large deposit mobilizations achieved by

CBE during GTPI period has become one of the main reasons for the
increasing trends of its average volatilities observed in same period.

o The large volatility figures recently observed in CBE do not necessarily indicate
the increase in „undesired fluctuations‟ of deposit balances as the figures are
crude indicators of swings in deposit changes.

o The seasonal index of CBE‟s total deposits suggests presence of only small
seasonal variations, with indices relatively close to 100 for all months.
 o The demand deposits of CBE reach the highest peaks during March, while the
low levels are observed during July to November. Whereas, the saving
deposits have large upward movements during May to August and downward
seasonal movements from September to December.

o Comparision of deposit seasonality indicated that months of low total deposits

for CBE have coincided with the months of peaks for that of private banks.

o The core deposit analysis revealed that 77.4% of the total deposits in CBE
have been below the core deposit trend line, indicating that this proportion of
total deposits remains in the bank all the way throughout the years. This can
be considered as a core deposit for the bank.

o CBE‟s saving deposit has the highest proportion of core deposit (94.5%)
compared to other deposit types.

o It was noted that the core deposit in the private banks‟ total deposit balances
(71.5%) is lower than that of CBE as a fund available for long run investment.
The gap in the proportion of core deposit between the CBE and private banks
is explained by the larger proportion of all deposit items, mainly saving deposit
in core deposit of CBE compared to that of aggregate private banks.

Recommendations
The major issues that demand some strategic interventions are as follows:

All processes, Districts and Branches

o The findings suggest that the Bank (CBE) needs to sustain its ongoing large
incremental deposit mobilization efforts in order to render continuous support
for the country‟s development programs and meet the large demand for credit
both on the part of the public and private sector.

o The bank has to further work to increase its saving customer base by
enhancing the customers‟ utilization of e-payment products mainly POS and
other channels – mobile banking and the CBE Birr.

Branches
o The findings indicate the growing competitiveness of Ethiopian banking
industry. By taking this into account, CBE branches should continuously
improve its services in order to continue harnessing the large deposit
mobilization advantages and retain predictable path of deposits levels.

o Saving deposit in CBE remained the most stable deposit type, which can be
committed for long term investments. This calls for CBE branches further
concerted effort towards increasing customer bases and sustain this level of
stable fund.

o Enhancing the customers‟ utilization of e-payment products mainly POS and

other channels – mobile banking and the CBE Birr will increase the stability of
deposit.

o The demand deposit of CBE comparatively had smaller proportions of core

deposits. Thus, CBE branches should ensure a proper follow up and tracking of
large demand depositors‟ transactions.