What is a core deposit intangible?
A core deposit intangible (CDI) represents the value of financial institutions’ long-term relationships with their core deposit customers. These reliable customers provide a stable, low-cost funding source that is critical for financial institutions’ operations.
The CDI describes the intangible value of the depository relationships held at a financial institution. One way to easily envision this, according to Abrigo Advisory Services Manager Manuel Aya, is to think of it as the value that arises from retaining depositors, and hence deposits, at an institution versus needing to go into the open market to fund activities. In other words, it represents the current cost of maintaining deposit accounts relative to the alternative cost of funds from sources such as advances from the Federal Home Loan Bank or overnight funding.
Historically, rapid and large increases in interest rates drive CDI levels higher. Higher interest rates reflect a higher cost of borrowing from the market relative to the cost of maintaining cheaper deposits, which can make the value of deposit relationships soar. During times of financial system stress, banks may adjust deposit rates more aggressively, bringing the cost of deposits closer to falling market rates. This could reduce the intangible value of deposit-related assets. As a result, lower CDI values may lessen the financial burden for acquirers, improving their capital efficiency.
In today’s uncertain financial landscape, deal values are likely to continue showing very different results between the initial due diligence process and the completion of a transaction, said Aya. “Under the uncertain circumstances expected to continue in the near term, financial institutions need to understand the potential magnitude and direction of changing values,” he said. “They also need to assess what the expected balance sheet impact will be.”
