Bank M&A to stall before 2024 rebound

Data InsightDealspeak 9 May

Bank M&A to stall before 2024 rebound

What many thought would be a rebound year for bank M&A activity is now expected to stall in light of recent events in the sector.

First Republic’s receivership and subsequent sale to JPMorgan Chase [NYSE:JPM] last week was the latest domino to fall in an already precarious banking sector following March’s failures of Silicon Valley Bank (SVB) and Signature Bank. Deal activity will remain low while banks gauge the regulatory response to the sector’s liquidity issues over the next quarter or two, said Invictus Group Chairman Kamal Mustafa and a sector advisor.

That is coming off an already muted 2022. There were 132 bank acquisitions in the US last year totaling USD 9.8bn, according to Mergermarket data. While deal value was down substantially from 2021’s 15-year high of USD 78.6bn, the number of deals dropped only slightly. Meanwhile, the first four months of this year saw 29 deals worth USD 18bn.

Under pressure

Industry experts have described SVB, Signature Bank and First Republic as unique situations. But other midsize banks have seen pressure in their stock prices since SVB’s failure, including Comerica [NYSE:CMA], KeyCorp [NYSE:KEY], Western Alliance [NYSE:WAL] and Zions [NASDAQ:ZION]. Shares in PacWest [NASDAQ:PACW], which last month received a USD 1.4bn financing from ATLAS SP Partners, tumbled last week after reportedly hiring Piper Sandler to consider strategic options including a possible sale.

Academic research organization SSRN found that nearly 190 banks with assets of USD 300bn are at similar risk to SVB if even half of uninsured depositors decide to withdraw their assets.

Big banks would like to step in to make more acquisitions but are limited in their ability to do so from a regulatory perspective, with JPMorgan’s purchase of First Republic a special situation after the latter was seized by the Federal Deposit Insurance Corp.

Private equity may have a limited role to play, said several fund managers and advisors.

Capital injections and distressed asset purchases might occur, but full takeovers are unlikely given the complexities of the banking environment and mixed returns from private equity involvement after the Global Financial Crisis of 2007-2008. Financial sponsor buyouts and investments in the US banking sector surged in the decade after that crisis, Mergermarket data shows, but have tailed off substantially in the last five years.

The degree of uncertainty in the market as well as instability around deposit bases and profitability will “dampen dramatically” the M&A landscape for the remainder of this year, the sector advisor said.

Pent-up demand

Still, assuming the economy does not head into a significant downturn, banks will want to transact again, he added. Historically, 3%-5% of banks merge out of the industry every year. Last year saw less than 3% of the industry consolidate, so many expected 2023 to rebound with a spurt of activity. But given recent events, this year could be even slower than last.

Pent-up demand should lead to a “very strong” 2024, absent a major credit event during the year, the sector advisor said.

Multiples are likely to drop substantially as activity rebounds, according to Mustafa.

Buyers are unlikely to get more aggressive as they will have less motivation on a relative basis to buy. That leaves sellers growing increasingly desperate to sell.

“M&A will come alive,” Mustafa said. “The consolidation of community banks is just going to continue. Size is very important now.”

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