Banks pulled back some on merger-and-acquisition activity over the past two years amid headwinds imposed by high interest rates and a
Still,
Banks
The downfalls of Silicon Valley Bank and Signature Bank in March of last year — followed by First Republic Bank in May — infused more uncertainty into the industry and ignited worries about the
Many deals came together nevertheless, and with rates leveling off in recent months and potentially poised to decline in the second half of this year per Federal Reserve Chair Jerome Powell’s comments this month to the Senate Banking Committee, analysts widely expect an increase in deal activity later in 2024.
First the impediments: The Fed pushed rates higher over the past two years to tame inflation. This had its intended effect — with inflation more than cut in half from 2022. But it came with side effects. High borrowing costs slowed banks’ loan growth and business owners’ new investments, raising recession worries. Lofty rates also drove up banks’ deposit costs and contributed to uncertainties that made it difficult for bank buyers to assess the health of targets. This, in turn, slowed activity.
“Concerns about rising interest rates and inflation — and their possible impact on the economy — dominated dealmakers’ thinking” over the past two years, said Jonathan Froelich, a partner in KPMG’s financial services practice.
The Fed “acted aggressively to crush inflation” and raised its benchmark federal funds rate by “a whopping” 4.5 percentage points in 2022 and added another 0.75 points in 2023 to bring its target range to 5.25%–5.50%, Froelich noted.
“Faced with much higher capital costs and the possibility of recession, most potential acquirers chose to stay on the sidelines and focused on increasing operational efficiencies and reducing expenses,” he said.
Yet, he said, the driving factors for bank M&A endure.
“Both the environment and our outlook have changed as 2024 begins. We agree with the consensus view that the Fed has completed its rate-hiking cycle and should begin to cut rates later in the year, which bodes well for dealmaking,” Froelich said. He is “optimistic that the level and pace” of M&A activity will bounce back this year and extend into the coming years.
Analysts say a multitude of catalysts for M&A abound, as they have since modern bank M&A and consolidation was hastened by fallout from the 2008 financial crisis. The banking industry has long been heavily regulated, but cracks in the system exposed by that crisis led to more rules and increased regulatory burden that have weighed heavily on community banks and pushed more to sell themselves.
What’s more, small-bank sellers, struggling to keep up with the technology spending of larger banks and intense competition for deposits, have joined bigger 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 increase interest income through loan volume and to diversify to help safeguard funding sources and credit quality.
Additionally, the industry is increasingly focused on extracting costs from the brick-and-mortar system and investing it back into digital channels. M&A provides a means to make major leaps on that front. Following deals, buyers can
Analysts also say that, after the 2023 bank failures, federal policymakers began to further ratchet up regulations in an effort to catch problems earlier and prevent future collapses. In doing so, however, they also raise new concerns about ramped-up compliance and capital costs that could hamper some banks’ ability to produce profits. More struggling banks may seek buyers as a result.
Size can “help banks absorb” costs and manage regulatory challenges, Dan Goerlich, PwC’s U.S. banking and capital markets leader, said in a report.
All of that noted, observers say eventually the number of banks will hit a critical low and M&A will have to slow and even level off or the U.S. economy could suffer from a lack of competition.
Compared to an
“As banks become fewer in number and bigger in size … the number of options for smaller borrowers to access credit becomes more constrained, which then impacts overall growth,” said John Sedunov, a professor of finance and real estate at Villanova University.