Study Says Acquisitive Banks Suffer Losses in Core Deposits

Bank buyers beware. Aggressive acquisition strategies are taking a toll on core deposit growth at major U.S. banks, a study by First Manhattan Consulting Group has found.

After analyzing the 30 largest banks and adjusting for their acquisitions, First Manhattan said core deposits at the 10 most active acquirers had dropped an average 5.2% from 1993 through 1997.

The 10 least active acquirers averaged an increase in adjusted core deposits of 9.5%.

First Manhattan defined core deposits as demand deposit, money market deposit, interest-bearing NOW, and savings accounts.

"If we think about the retail business, these four classes of deposits are overwhelmingly the source of revenues," said James McCormick, president of First Manhattan. His analysis showed that, for a typical acquirer, "there is a price to be paid in terms of relative growth."

To be sure, deposit losses are an expected side effect of large mergers. Changes in products, pricing, and personnel often prompt customers to take their business elsewhere, especially when there are glitches in integrating the systems.

Branch consolidations often drive customers away. And in-market deals often include forced as well as voluntary divestitures of deposits.

But the wide performance disparity between active and less active acquirers underscores the effect an acquisition strategy can have on a bank's relationships with its retail customers.

"You see a lot of acquirers having trouble on the revenue side," said Joseph A. Stieven, an analyst at Stifel, Nicolaus & Co. "They assume the company they're buying will grow next year just like normal. But it just doesn't work that way. And not enough acquirers talk about it."

Charlotte, N.C.-based NationsBank Corp., one of the most active acquirers in the country, saw its average deposits grow only 0.475% for the year ended June 30, according to First Manhattan.

But a NationsBank spokesman said deposit growth was closer to 2%, when adjusted for certain divestitures. Moreover, the banking company has had 6% growth among core deposit relationships it considers to be the most profitable, he said.

"Your low-cost deposits are clearly something you value," said Robert S. Patten, an analyst at Lehman Brothers. "If you're losing your low-cost deposits and your revenue comes from your spread, that is something you have to pay attention to."

Sean J. Ryan, an analyst at Bear, Stearns & Co., said attrition is not always a bad thing for banks.

"There is a flip side to the coin," he said. "Depending on who you're acquiring, you may be acquiring somebody who had core deposits and relationships that you don't want."

Still, Mr. Ryan said, lackluster growth in core deposits is a merger side effect that should worry management.

Too often, executives at aggressive acquirers take their eye off the ball, and baseline businesses suffer.

"Doing acquisitions is its own skill set, and it soaks up management bandwidth," Mr. Ryan said. "That leaves less time for the nuts and bolts of running a bank, including growing revenues."

First Manhattan's Mr. McCormick said his company's analysis found significant differences in performance within the group of active acquirers and within the less acquisition-oriented group. The findings indicate that some banks are more carefully managing integrations.

"Some of the banks are getting much better at managing the transition," he said.

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