Bank merger and acquisition activity remained at relatively low levels in the third quarter, a Raymond James tally found, with volumes held in check by regulatory hurdles, recession fears, Federal Reserve interest rate hikes — and a potential shift of power in the U.S. legislature just a month away.
"Moreover, ongoing Fed tightening (and the expectation for more to come), ongoing geopolitical uncertainty as the Russia-Ukraine war plays out, continued
The looming midterm elections in November — in which the balance of power in both the U.S. Senate and House are in play — add
"We expect economic, regulatory, and political uncertainty to weigh on M&A activity levels through year-end, where annualized activity levels equate to the slowest year for M&A activity since 2012 (excluding the COVID-impacted 2020)," the Raymond James analysts said.
Banks announced 37 deals in the third quarter, up just one from the 36 transactions in the prior quarter and well below the 64 deals announced in the third quarter of 2021. The analysts also examined the number of announced acquisitions in the past quarter as a percentage of the number of institutions at the beginning of the year. At 3.06% annualized for the third quarter, activity was slightly above the 2.98% reported in the second quarter but well below the 5.12% reported in the third quarter last year, the Raymond James analysts said.
On a year-to-date basis, Raymond James said the 2022 annualized rate of 3.40% puts this year currently on pace to be the slowest since 2012 (3.36%), aside from 2020 (2.28%), and well below the levels seen from 2014-2019 (range: 4.08-5.03%).
An ongoing issue that's keeping these numbers low is the
That began to dissuade deal conversation early in the year. Then inflation kicked into overdrive following Russia's invasion of Ukraine — reaching a 30-year high in May — and galvanized Federal Reserve policymakers to ratchet up interest rates to rein in soaring prices. Recession fears have since mounted, given that soaring rates have historically stalled the U.S. economy.
Recessions typically hinder borrowers' ability to repay loans, resulting in higher credit losses for banks. For acquisitive banks, the specter of recession makes it difficult to gauge the health of would-be sellers' balance sheets and, as a result, many buyers have delayed M&A plans.
"There are multiple factors at play right now," said Jacob Thompson, a managing director of investment banking at Samco Capital Markets.
Damon DelMonte, an analyst at Keefe, Bruyette & Woods, said M&A would inevitably be an important area of focus during the coming third-quarter earnings season.
Despite the recent barriers to activity, he said, many banks remain highly interested in striking deals to gain scale, talent and geographic diversity. Community and regional lenders are looking to join larger banks with cost-efficient digital offerings and to enter new growth markets — and acquisitions can provide an efficient route to get there.
"It has been a really quiet year so far," DelMonte said. "Buyers are wary of an economic slowdown and don't want to overpay or get stuck with a seller's credit quality issues. But if we can get some positive clarity on the economy, I think some of that reluctance goes away, and buyers will get active again."
The fourth quarter got at least a notable bump on Tuesday, when Prosperity Bancshares in Houston said it
Cullen Zalman, Prosperity's senior vice president of banking and corporate activities, said in an interview that regulatory delays are a genuine industry concern. But Prosperity closed 10 deals in the past decade, and Zalman says that gives the bank the experience and credibility needed to cinch both deals in relatively short order.
"We have a very solid plan and are confident in it," Zalman said.
