To understand the true value of underlying deposits, acquirers — whether they are banks or fintechs — must dig deeper into the deposit portfolio during the due diligence period. They must apply similar levels of rigor as is traditionally conducted on the loan portfolio.
Novantas believes that potential acquirers should ask the following questions about a target bank’s deposit portfolio:
- What portion of the deposit portfolio is truly core — i.e., tied to core checking customers? How has this base been growing over time?
To do this, acquirers must analyze deposit tapes over multiple snapshots and ensure they understand the full customer relationship. To the extent that these questions can be answered on a relative basis (compared with peer banks), this should help the buyer to understand value relative to recent, comparable transactions.
- What portion of these core deposits are at risk of leaving due to M&A-related disruption, such as branch closures and product migration?
Past M&A experience is helpful for estimating impact, though only if deals are similar in size and type. Industry benchmarks are also extremely helpful when past experience isn’t available or relevant. Novantas typically sees 5-10% runoff of core deposits in most transactions, although it is important to note that some banks see next to nothing and others experience significantly more.
- What is the price sensitivity of rate-based deposits? Which deposits would stay if they were to be repriced?
To answer this correctly, a potential buyer must understand the price elasticity of the portfolio. This can be done by analyzing trends in acquisition and retention based on the target bank’s relative pricing over time. Again, benchmark data can be useful since target banks may not provide adequate data during the due diligence period or they may not have tested enough price points to provide adequate information. Novantas often finds pricing opportunities when this type of analysis is conducted — the target bank’s deposit portfolio could be repriced downward without significant deposit runoff.
- To what degree can existing channels continue to generate new core deposits in the future? How will acquiring the institution help or hurt our ability do so?
Here, acquirers should start by understanding how the target performs in terms of new production and how that compares with benchmark levels, as well as with the acquiring bank itself. Then the acquirer should estimate how that would change in a post-acquisition environment; how would the new brand fare in the market? Are there any changes to product, sales or marketing that could impact performance?
- How will all the above be affected by changes to the economic environment?
A proper due diligence plan will evaluate an expected rate scenario, as well as plausible alternative rates. Understanding how the portfolio performed in past rising/falling rate scenarios is useful, though acquirers must also consider what would be different about the portfolio moving forward.