Banks slammed the brakes on already meager merger-and-acquisition activity following the spate of regional bank failures this year.
The downfalls of Silicon Valley Bank and Signature Bank in March — followed by First Republic Bank in May — infused uncertainty into the industry and ignited worries about the sustainability of deposit levels. Besides the failures, there have also been
Through the first five months of 2023, there were 32 bank deals announced, far from the 66 inked over the same period in 2022, according to S&P Global Market Intelligence data. The aggregate disclosed deal value fell to $580 million from $3 billion in the year-earlier period.
But some analysts say that in the aftermath of bank failures, federal lawmakers tend to ratchet up regulations in an effort to catch problems earlier and prevent future collapses. In doing so, however, they may also ramp up compliance and capital costs and hamper some banks' ability to produce profits. When this happens, struggling lenders seek buyers. If would-be acquirers can get a better sense of any
Gaining scale can "help banks absorb an
Additionally, he added, "size matters in the immediate aftermath of the bank stress events as retail and corporate customers equate being bigger with being more financially stable."
Jacob Thompson, an investment banker at Samco Capital Markets, echoed those sentiments in an interview. He said a multitude of catalysts for M&A, particularly deals involving community bank sellers, will come back into play.
He said small bank sellers, struggling to keep up with the technology spending of larger banks and intense competition for deposits, may look to join larger banks to create more efficient digital offerings and to contain funding costs.
Larger community and regional banks, meanwhile, are eager to broaden their deposit and loan portfolios, giving them greater options to grow interest income through loan volume and to diversify to help safeguard funding sources and credit quality.
"I do think that, once we get some clarity here on the economy, deal conversations are going to pick up meaningfully," Thompson said.
Meanwhile, Janney analyst Brian Martin said bank M&A is caught in a "deep freeze."
Martin noted that deal activity had slowed in 2022 — down about 25% from the prior year — and reached the weakest level in more than a decade. Dealmaking this year looks even more anemic, with activity down nearly 60% as of mid-June when compared to 2022, he said.
Martin said the combination of increased regulatory scrutiny under the Biden administration last year, economic uncertainty this year and spiking interest rates since the spring of 2022 has hindered activity. The Federal Reserve raised rates 10 times over the past 15 months to tame inflation, but it paused that campaign in June.
"The adverse impact of higher rates on a seller's loan and bond portfolios has made it more challenging to assess a fair deal price," Martin said.
However, he said, "this should be less of a headwind going forward as rates are expected to begin to stabilize."
Looking ahead, Martin also expects M&A announcements to "pick up later this year and in 2024, as demand heats up following two years of lower activity. Bankers remain interested in M&A to expand their geographic footprint, add new talent [and] business lines, increase scale to better compete with larger banks and drive earnings in periods of slower economic growth."
