The Importance of Deposit Due Diligence As Rates Start to Rise

It may be easy to overlook deposit portfolios when conducting due diligence on potential acquisitions. After all, roughly $3 trillion of deposits have surged into the industry since the pandemic began, the yield curve remains relatively flat and there is little variation in rates between top and bottom performers.

But this is precisely the time when bankers should pay attention.

That’s because deposit quality has been masked by the current ultra-low rates. When rates rise, the winners and losers will start to reveal themselves.

Surface-level due diligence won’t be good enough to understand the true underlying quality of deposits. Acquirers must dive deeper into the deposit portfolio by conducting a thorough analysis of the target’s deposit base.

The extra investment is likely to be well worthwhile. Based on empirical data from the previous two rising-rate cycles, Curinos estimates that an inaccurate assessment of the quality of a target bank’s deposit portfolio during due diligence could overvalue the target by up to 20%.

In essence, don’t assume a target bank’s performance at the bottom of the rate cycle is indicative of how the bank will perform when rates rise. Only through a thorough inspection of a target bank’s deposit portfolio can acquirers understand how its customers will react as the environment changes.


Curinos experts have long advised clients to dive deeply into the deposit portfolio of a potential target. Indeed, we addressed this topic in a 2018 article that analyzed the rising-rate cycle of 2004-2006. We found that simple misestimates of deposit betas in 2004 resulted in a difference of more than 50 basis points in target bank deposit rates by 2006. It was unclear, however, if this analysis would be valid today, given how much the banking industry had changed. Therefore, we decided to update our analysis to reflect the more recent rising-rate environment of 2015-2019. The findings were strikingly similar – a bank’s deposit performance at the bottom of the rate cycle is a poor predictor for performance as rates rise. (See Figure 1.)

Figure 1: Target Bank Acquisition Scenarios (Hypothetical Deal at Bottom of Rate Cycle)

Cost of Funds Over Time

Take, for example, a bank with average deposits costs of 30-40 bp in 2015. Acquirers that take a simplistic approach to deposit due diligence (which, from our observations, is a common approach) may believe that these types of target would achieve industry-average betas when deposits rise because it had industry-average deposit performance in 2015.

In reality, bank betas were materially different from each other in 2015-2019 and a bank’s performance at the bottom of the rate cycle was again a poor predictor of what its rates will be at the top of the rate cycle.

In fact, the new Curinos analysis reveals that banks with average deposit performance at the bottom of the 2015-2019 rate cycle only had an average beta about one-third of the time when rates rose. A third of the time the bank had a notably higher beta and the final third of the time the bank had a significantly lower beta.

For a potential buyer, a miscalculation of the future beta could have resulted in over-or-underestimating deposit costs by 40-50 bp at the peak of the rate cycle. That translates to about 20% in value based on typical bank PE ratios, or $30 million per $1 billion in assets.


What can banks be doing to up their deposit due diligence game? It starts with detailed analysis of the target bank’s deposit customer base. Many acquirers settle for a single point-in-time deposit tape and focus on liquidity risk assessments, analyzing portfolio concentration or upcoming maturity bubbles.

Curinos recommends that buyers at a minimum request multiple snapshots spanning multiple years, including higher-rate time periods. (If a bank doesn’t have ready access to this, it may make you wonder whether they know what sort of deposit book they have.) This will help acquirers understand three things:

  • What the portfolio looked like in a higher, more normal rate environment
  • How the portfolio evolved over time, including the underlying drivers of growth, which is especially important today in light of the surge deposits
  • Full customer relationship dynamics (not just account-level dynamics), which helps assess the stickiness of the customer base

It also helps to compare the target with reliable benchmarks across key measures of deposit performance. There are no shortages of valuation multiples to estimate the fair value of a target bank, but acquirers need to understand relative deposit quality to know whether it makes sense to pay a premium or discount relative to recent market deals. Benchmarking deposit-related KPIs, such as acquisition and retention rates, portfolio mix and concentration, portfolio and new money rates, branch productivity and customer relationship depth will go a long way to helping the bank understand relative performance and contribution to overall valuation.

Lastly, intensive deposit due diligence can help acquirers get a head start on integrating the target bank’s products, pricing, branches and front-line staff after the deal is completed. Too often these elements are glossed over during due diligence.

As an example, we have seen acquirers complete simplistic branch proximity analysis (e.g., branches within X miles of each other), incorporate closure assumptions into their valuation models and announce publicly their branch closure targets at time of deal announcement, only to be later hamstrung when they realize that some of those branch closures would have material negative customer impact.

Banks that invest in due diligence can complete a more detailed analysis of branch closures that takes into consideration estimated customer impact and broader market-level strategy. Not only would this help value the transaction, but also provide a jumpstart to integration planning.

In today’s banking environment – where banks are flush with deposits and rates are effectively zero – acquirers may be paying less attention to target bank deposit portfolios than they should. Misestimating deposit quality could be costly in the future because it may lead to missed opportunities to find quality gems or could lead to overpaying (as much as 20% more) for a bank when rates change down the line.

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