- The value of core deposits is one of the key drivers of the long-term success of any bank M&A, so determining their correct value is essential.
- But valuing deposits is highly complex and requires more than cursory due diligence on high-level data in the deal room. Extra effort up front can pay for itself many times over.
- Then once the deal is done, the truly hard work begins, and it needs to embrace four broad drivers of post-deal success.
The market is buzzing about the prospect for a wave of bank M&A. Strategic transactions can be transformational in improving unit economics, achieving footprint expansion and growing core deposits quickly in highly competitive markets. Just how core those deposits turn out to be is one of the key drivers of the long-term value of bank M&A. Getting good value for the core deposit premiums and Core Deposit Intangibles (CDI) on a transaction depends on the acquirer’s ability to retain existing customers and accelerate core customer acquisition. But that can be easier said than done.
According to the Curinos M&A benchmark, average branch-based deposit attrition from Legal Day 1 to three-months post conversion is 11.1%. Even more striking, the spread between good performance and poor performance is more than 12 percentage points in that same timeframe (Figure 1). That’s a huge range. The extent to which the core customer deposit franchise is retained can literally make or break the deal economics.
Figure 1: M&A Benchmark Balance Attrition
Source: Curinos Analysis, Curinos Customer Impact of Bank M&A Study, Curinos Analyzers
Pre-Deal Due Diligence
While there’s widespread agreement that core deposits are central to deal value, there’s a lack of consensus on how to measure them, even among the most sophisticated operators, investors and advisors. That may sound surprising, but put in the context of the perennial debates over funds transfer pricing (FTP) and how to measure primary customer relationships, it shouldn’t be. Valuing deposits is highly complex, and doing it well requires more than cursory due diligence on high-level data in the deal room.
Simple categorizations such as “checking vs. savings” or “operating vs. non-operating” deposits are simply insufficient to properly value a deposit book. More thorough due diligence will dive deeply beneath the surface, to the underlying customer relationships, more detailed segmentations of customers and deposits, and a wide range of potential concentrations within the book. In addition, more thorough due diligence will unpack the drivers of performance to include, for example, flow of funds and relative pricing on various segments of the portfolio. This extra work up front can pay for itself many times over in refined deal economics and more accurate forecasting of post-transaction deposit behaviors.
Integration Considerations
Once the deal is done, the truly hard work begins. Here are four broad drivers of post-deal success:
First is protecting the customer base to limit the meaningful attrition most banks experience between Legal Day 1 and the immediate aftermath of conversion. This entails customer scoring to identify the most critical relationships to protect, product mapping, and personalized white glove programs to retain the most valuable customers—and bankers. Pricing integration across deposits and fees is also critical. Often, legacy institutions will have used fundamentally different pricing strategies within the same customer segments—whether promotional vs. everyday rates in Consumer or exception pricing in Commercial and Wealth.
Second is cost savings, which can include network optimization, servicing optimization and go-to-market model alignment. Getting these right mitigates up-front attrition risk and accelerates near-term shareholder returns. Network optimization through integration tends to be one of the largest drivers of customer attrition. Striking the right balance between the network’s billboard value to drive growth, the operational expense and the ability to maximize the value of future customer growth becomes the most critical in the cost-savings category.
Third, it’s important to look beyond the most immediate integration imperatives to longer-term drivers of franchise value. In the near term, that means figuring out how to activate the primary-customer acquisition engine as a combined franchise. This includes devising integrated strategies at the market level in geographies that are either entirely new or where the transaction has materially changed the combined bank’s position. Specifically, it calls for integrating marketing investment and leveraging the expanded capabilities of the combined institution to capitalize on newly available cross-sell potential.
Fourth, the combined institution must identify the longer-term drivers of success and distinctiveness. This entails aligning on a compelling value proposition across the right customer segments and driving it through not just marketing but product design, digital experience and the organizational model. Getting this right will set up the new franchise for future growth, with results that are 5x the level of acquisition relative to competitors who do not have a compelling value proposition.
Maximizing the Synergy
M&A can be transformative, but measuring and achieving franchise value is difficult. While comprehensive due diligence is critical, full value realization also requires a comprehensive approach to integration. That means looking beyond simple product mapping to the underlying drivers of each legacy institution’s value exchange with its customers and the combined institution’s value proposition. The ultimate measure of success will be whether or not these elements are brought together in a way that makes the entity greater than the sum of its parts—which was the idea, and the ideal, to begin with.
