Get ready for another wave of consolidation.
The past 10 days have been a critical period for large-scale bank M&A with developments that could increase the pool of acquirers and provide an incentive for even the most independent-minded institutions to mull a sale.
The year’s three biggest bank deals, including Fifth Third Bancorp’s agreement to buy MB Financial, have all been announced since May 14, with attention-getting premiums and a total value exceeding $7 billion.
Lawmakers on Tuesday, meanwhile, finished passing a sweeping regulatory reform bill that provides breathing room for a number of growing banks, particularly by increasing the threshold for becoming a systemically important financial institution to $250 billion.
These events, combined with an overhaul of leadership at the top regulatory bodies, could embolden more large banks to pursue acquisitions — and pay up for what they pursue.
Buyers are now in a much better position to pay the price needed to persuade targets to sell. The sellers in the trio of recently announced large deals — MB Financial in Chicago, State Bank Financial in Atlanta and Guaranty Bancorp in Denver — commanded an average premium that was 282% of their tangible book values.
That’s much higher than the 165% average price to tangible book value for all deals announced last year. And it still surpasses the 207% average premium for 2017 deals in which the seller had assets of $5 billion or more.
Buyers also can better afford to pay hefty price tags. Bank stock prices have appreciated by more than 20% over the past year, despite some turbulence earlier this year.
It’s true that investors haven’t been kind to the stocks of banks that have announced highly dilutive deals, but that hasn’t stopped many growth-minded institutions from forging ahead. KeyCorp and Fifth Third’s deals show they have confidence that they can hit their targets and win over skeptical shareholders.
There is another looming factor that will fuel consolidation: FOMO, a fear of missing out in a strategically important market. That could address the bid-ask spread that has existed between buyers and sellers in recent years.
Key markets matter and, theoretically, the values of unsold banks rise every time a competitor cashes out. That bodes well for folks at banks like Wintrust Financial and First Midwest Bancorp in Chicago, CoBiz Financial in Denver, Green Bancorp in Houston and United Community Banks near Atlanta, even though many of these banks still view themselves as acquirers.
Even sizable banks such as Prosperity Bancshares and Synovus Financial are suddenly digestible to a larger institution that is no longer encumbered by the SIFI threshold.
The market hasn’t reached that level of intensity — yet.
But buyers that have been on the sidelines have had years to contemplate their next big move and which targets will help them meet growth objectives.
An increasing number of aspiring buyers could become motivated to chase a deal, especially if they have their sights set on a city with limited targets. Greg Carmichael, Fifth Third’s chairman and CEO, recently said he spent more than a year talking to MB Financial before getting to the handshakes. He acknowledged that the declining number of decent-sized banks in Chicago helped spur his interest in the acquisition.
Increasing the SIFI threshold, meanwhile, reduces the number of “systemically important” institutions by two-thirds, giving bigger institutions more control over capital deployment. It also removes a fear factor for banks with $20 billion to $49 billion in assets that were flirting with heightened regulatory scrutiny.
That comes on top of a belief that the new batch of regulators are more amenable to approving larger transactions.
The Federal Reserve made it clear when it approved People’s United's purchase of Suffolk last year that deals creating banks with $100 billion or less in assets were not a threat to the financial system, excusing those transactions from a more rigorous review. The prior threshold was $25 billion.
Regulators also signed off on bigger deals by KeyCorp, Huntington and BB&T.
That’s not to say that regulatory approval is a slam dunk. On average, deals took 65 days to get regulatory approval last year, a 10% increase from 2016.
And New York Community Bancorp was never able to secure approval for its planned purchase of Astoria Financial, though many industry observers believe that had more to do with asset concentrations than a broad regulatory reluctance to big deals.
Still, it seems likely that the market could look back a year from now to see a moment where buyers opted to open their wallets a little wider to pursue long-term goals.
The banking industry is at a crossroads that could make for an interesting M&A ride. Buckle up.
Bankshot is American Banker’s column for real-time analysis of today's news.