bg-arrow-down icon-arrow-up icon-back-to-top icon-linkedin icon-menu icon-search icon-twitter logo-white slider-arrow-left-gray slider-arrow-left slider-arrow-right-gray slider-arrow-right

Deep Dive | Deposit Premiums Rise, Will Play Larger Role in Bank Mergers

There’s even more proof that deposits shouldn’t be taken for granted.

A recent wave of M&A activity has underscored the growing value of deposits for acquirers. High-quality, low-cost deposits are so valuable, in fact, that buyers are increasingly willing to pay up for them.

That means that deposit due diligence, an often-overlooked exercise, is more important than ever. The problem is that the traditional method of due diligence, in which bankers assess asset and credit quality, doesn’t use customer-level analytics to evaluate deposits.

The attractiveness of deposits is apparent even though one-day stock-market premiums for bank deals declined for the fifth straight year in 2018.

Deposit premiums increased at a low double-digit compound annual growth rate (CAGR), rising to 10%. At the same time, price-to-book ratios only increased about 4%.

This can easily be attributed to the scarcity of high-quality deposit pools that are needed to fund growth.

Even less surprising — given the need for big banks to find larger funding pools — is that the top 10 deals in 2018 paid an average deposit premium of roughly 16%. That is 60% more than the average deal announced in 2018.

Novantas believes that a greater focus on deposits in the due diligence process can help improve returns estimated by bank acquirers this year.

Going forward, deals must include a thorough review of the acquired deposit franchise, including pricing and associated customer behaviors that can further improve the value proposition to customers and shareholders. While the low-hanging fruit of cost reductions and improved scale will provide a good foundation for hitting deal targets, a key consideration for beating targets will be the ability to maintain the pro-forma deposit franchise, especially the back book.



Two large recent bank tie-ups were structured as merger of equals (MOEs) with little-to-no premiums attached. Each brings different opportunities and challenges for the respective banks, but one thing is clear: both transactions are focused on increasing scale, increasing analytics and access to quality regional deposit pools.

While large-scale deals have essentially been absent since the financial crisis, Novantas believes that 2019 will bring additional deals of similar size. In part, that is due to new regulations that ease the burden on large banks, giving potential buyers more freedom to grow through acquisition. The change opens a new chapter in bank M&A domestically and puts pressure on all parties to push towards greater scale.

Scale is certainly important, but it isn’t sufficient on its own. Instead, banks must also focus on managing the customer-deposit franchise.

Larger deals often create larger disruptions for customers, especially those whom are part of the back book where a majority of the deposit value resides. Banks are already starting to consider using analytics to identify high-value deposit pools associated with transactions.

It is no coincidence that the stocks of several super regionals have outperformed when others have announced MOEs. One thing that has largely gone unnoticed — and Novantas believes this isn’t a coincidence, either — is that the national banks mostly underperformed the sector on that same day.

We all know that national banks have dominated the landscape in the post-financial crisis period. And Novantas often tells clients “you will never out-national the nationals in terms of spending on analytics and marketing.”

But the recent swing in the regulatory pendulum provides a new opportunity for the super regionals and foreign banks to increase their analytical capabilities to challenge national banks in several markets.

The cornerstone of these efforts starts and ends with thorough due diligence that includes understanding deposit behaviors at the account level and aggregating that analysis to uncover the target bank that contains the best deposit pools for the acquiring bank
to leverage.

After all, this may be the last opportunity for super regionals to effectively compete against their larger brethren.


Bob Warnock
VP of Industry Analysis, Chicago
rwarnock@novantas.com

For more information, contact Novantas Marketing

+1 (212) 953-4444


Related Materials

article

Deep Dive: What the Interest-Rate Upheaval of 2019 Means for 2020

The yield curve’s fluctuations kept our heads spinning in 2019. What does it portend for 2020?

article

Deep Dive | Funding Will Be Key As Yield Curve Flattens

The flattening yield curve is expected to continue pressuring industry profitability in coming months, even though the Fed has hit the brakes on interest-rate hikes.

article

Deep Dive | Deposit Premiums Rise, Will Play Larger Role in Bank Mergers

There’s even more proof that deposits shouldn’t be taken for granted.