Back in Business

By Nathan Stovall

After a slow start in the first quarter of 2021, the pace of bank deals has increased notably as easing credit concerns brought many buyers back into the fray. Potential sellers, meanwhile, continue to face earnings headwinds as excess liquidity and low interest rates pressure net interest margins. Fundamental revenue pressures, growing comfort from buyers and desire to achieve scale to invest in technology and reduce costs should support a further rebound in bank M&A activity and lead to the highest aggregate deal value recorded since the global financial crisis in 2021 and 2022.

In late August, we projected that about 230 deals with an aggregate deal value of $63.3 billion would occur this year, which would represent the highest mark since the global financial crisis. But even that estimate of record deal activity could prove too conservative. Through Oct. 13, 166 bank deals with an aggregate deal value of $57.3 billion had surfaced.

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The projected level of banks selling in 2021 would equate to nearly 4.7 percent of U.S.-based banking institutions. Such a pace of consolidation would be slightly below the level witnessed in 2019 but roughly on par with activity seen in 2018.

We believed that aggregate deal values could stand out even more as we expect regional banks to represent a higher percentage of all targets than seen in years past. Banks with between $10 billion and $50 billion in assets have already made up a far higher concentration of sellers this year—nearly 4 percent of all targets compared to just over 1 percent between 2017 and 2020—as more institutions have sought scale to improve efficiency and allow investment in technology to keep up with shifting customer preferences to digital channels.

Through Oct. 13, 19 deals with values over $500 million had already surfaced in 2021, the highest number since the global financial crisis.

We believe regional banks will continue to make up a larger proportion of sellers when compared to prior years as they seek scale to keep up with the technology investments made by the nation’s largest banks. We expect the trend to continue in 2022 and project that aggregate deal value could near $60 billion.

A number of sellers, including among the regional ranks have noted that the scale offered through transactions was attractive. Investors Bancorp agreed to sell to Citizens Financial Group for $3.65 billion in late July, representing the fifth-largest bank deal announced in 2021. A few months earlier on the company’s first-quarter earnings call, Investors President Domenick Cama said there was compelling reason to pursue deals simply because being bigger allows institutions to become more diversified and allocate more funds to investments in technology.

Buyers are looking for scale as well. M&T Bank Corp., the acquirer in the largest deal announced this year—the planned $7.60 billion purchase of People’s United Financial Inc.—said the transaction would allow it to leverage past technology and infrastructure investments across a broader base. M&T Chairman and CEO René Jones said on a conference call to discuss the deal that M&T invested to become faster and nimbler and that he expects to export those enhancements to the People’s franchise without additional investments.

The PNC Financial Services Group made a similar case when touting its $11.57 billion purchase of BBVA USA, announced in November 2020. PNC Chairman and CEO Bill Demchak said on the deal call that the company would onboard virtually everything that BBVA does onto its platform, automate many of the risk and control functions at the institution, and effectively take the total cost “down to nothing.”

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Buyers also want scale to combat the pressure on margins due to persistently low rates and trillions of dollars of excess liquidity. Meanwhile, digital adoption has accelerated considerably due to the pandemic. Against that backdrop and a low-rate environment where deposits are worth less, many banks are operating with elevated cost structure associated with their branches and deals offer the opportunity to right-size their physical distribution networks quickly. While most banks have worked to trim their branch networks on their own, deals offer the opportunity to take advantage of potential overlap with a seller’s branches and close branches without taking as great of a risk of losing business.

Many buyers have plenty of capital and firepower through their stocks to pursue deals as well. Would-be acquirers trade at higher multiples than their smaller counterparts, giving them a healthy currency to pursue transactions.

Still, there is some concern the regulatory scrutiny over bank M&A could grow, particularly larger transactions, due to President Joe Biden’s executive order encouraging a “revitalization of merger oversight.” Some deal advisers expect the deal approval pace to slow but still believe that transactions will get done, but some bankers, including ones that had previously announced sizable acquisitions, said they expect the order to result in considerably more scrutiny.

“A larger deal in today’s environment would get much more political scrutiny and noise than we did with the BBVA deal. And that weighs on us,” said Demchak on the company’s second-quarter earnings call when asked about the executive order.

At least one larger transaction, the $2.16 billion merger of equals between First Citizens BancShares and CIT Group, has faced delays. The two institutions recently extended their merger agreement as they continue to wait for approval from the Federal Reserve. The banks announced the deal in October 2020 and expected to close in the first half of 2021. Management teams have now extended the deadline to March 2022, and some analysts suspect an unfavorable political climate is playing a role.

As the ultimate impact of the executive order remains unknown, buyers could look to move before any official regulatory changes are made. Any would-be buyer no longer looks at acquisitions like the prospect of trying to catch a falling knife either. Few loans have gone bad because myriad government relief efforts have served as an effective bridge over the pandemic-led downturn. We expect that strong credit performance should hold through the remainder of 2021, giving buyers greater confidence in pursuing acquisitions.

It seems that the potential tailwinds for further M&A activity far outweigh headwinds, setting the stage for a considerable pickup in deal announcements.

Nathan Stovall is a principal analyst for the FIG Research offering of S&P Global Market Intelligence.