Valuing Core Deposits: Balance vs Accounts Methodologies

How valuable is your valuation? When it comes to financial institutions valuing their core deposits, all is not necessarily equal. While the Advanced Assessment Methodology (AAM) used here at MVRA applies to a wide range of circumstances, and is often the most reliable, go-to approach, with the idiosyncrasies between financial institutions and the records they hold making each unique in their own way, knowledge of alternative methods are key to understanding when a valuation is most accurate and beneficial.

There are several factors that might indicate the need for an alternative assessment; for example, it might be worth considering if you are able to track all your bank deposits for a fixed set of accounts over a specific time period, or whether you know the actual value of particular retained accounts. It’s worth noting that each method will have its own implications in terms of costs, meaning that different tools will apply to different budgets. 

To help you understand the ideal strategy for you to value your core deposits, we will focus on two methods: the Balance- and Account-focused practices.

Valuation Practice - Balance

In instances where there may be a readily-available history of the deposits, for a fixed set of accounts (for any time period), financial institutions can calculate the value of their current deposits based on the monetary value of customer retention over the years.

Known as retained deposits, this ostensibly offers a fairly accurate, figure-based insight into the current value of your deposits across specific accounts, providing you with historic data to base your future financial decisions. Nonetheless, this becomes less straightforward in an absence of detailed information on those accounts and the specific time period for which those balances were held. In addition, if there are any lapses, gaps or inconsistencies in data records, then the accuracy of this method can decrease substantially too.

Valuation Practice - Account

While the balance approach is a perfectly viable method for some, many institutions will not have a thorough enough record on retained deposits. In this case, they may rely on data from the number of their accounts. 

This approach focuses on account retention rather than deposits. Due to the unpredictable nature of customer behaviour, this method comes with a significant set of variables and might not provide accurate information on the value of balance retention—most notably where account holders may hold dormant or low-value accounts.

Which is the best practice for you? 

As demonstrated, choosing the best approach to determine the value of your deposits will largely depend on your individual circumstances; your data, your customer base and a methodology which takes both into account—such as the AAM—is likely to apply to most circumstances without requiring (and incurring the cost of) deep analysis into the state of available information.

Data suggests that of the two Balance and Accounts methods however, a majority of financial institutions might benefit from tracking their balance size. This is due to the fact that relying completely on retained accounts might result in under, or overestimating the deposit value. Notwithstanding the few cases in which focusing on accounts might be more useful, if less accurate. 

Considering the cost of carrying out a thorough analysis, the balance method may be more apt for those specifically conducting reports to meet regulatory compliance. Furthermore, if core deposits have little to no value, using retained accounts might constitute a sufficient strategy. 

Truly understanding the most suited option to value your core deposits is simply not possible without a thorough analysis of where you currently stand and what your options are. 

The ultimate question that remains is: does the value of getting an accurate valuation balance out the cost incurred?

Would you like to find out more about methodologies for valuing core deposits, including how account types (such as business and personal) can affect valuation accuracy? Then subscribe for free to access the full whitepaper now, or schedule a meeting here.

Written for MountainView Risk & Analytics in September 2021