Even as the regulatory tide turns in favor of bank mergers and acquisitions, the deal math remains a challenge, leading to a mismatch between banks' objectives for M&A and their investors' expectations.
That imbalance is hindering a wave of consolidation that had been expected this year, according to experts. Its crux: Banks are generally looking to consolidate in reaction to problems, like the need to add low-cost deposits and aging CEOs at institutions that are looking to sell. Shareholders, on the other hand, are looking for returns that might not materialize.
"As we look forward, the biggest concern I hear from bank management teams is, 'How is the stock going to react?'" Bank of America equity analyst Ebrahim Poonawala said at an industry conference last week. "What you hear from investors is, 'Are they going to be a buyer or a seller? If they're a buyer, I don't want to own the stock.'"
The majority of bank deals aren't accretive to the buyers, he said.
But that isn't always the point, said David Sandler, a managing director and co-head of investment banking at Piper Sandler, in comments at the same event, which was hosted by Fitch Ratings and KPMG. Banks are playing defense, as challenges push them to seek an out — like selling.
The start of the Trump administration was expected to usher in an environment ripe for dealmaking following a harder stance from regulators during the Biden years. Bank stocks surged after last year's presidential election, and expectations rose that interest rates would come down. Taken together, it painted a rosier picture for the financial promise of M&A.
But through May 5, 44 bank deals had been announced, according to data from S&P. That was just slightly ahead of last year's pace, when a total of 125 deals were announced by the end of the year.
On defense
Large regional banks most often seek out deals to cut costs across a combined institution, Sandler said, which he called an "incredibly defensive posture." More banks are being forced to sell than the number that are strategically looking to buy, Sandler said.
Most potential buyers are on the hunt for low-cost access to funding through a broader deposit base.
"That's most of why these banks are merging," Sandler said. "They call it scale. It's really largely survival and visibility into continued earnings."
To be sure, some banks make acquisitions to expand their products and services, but those aren't the "biggest drivers," Sandler said.
Columbia Banking System in the Pacific Northwest
Columbia also projects that it will gain some $900 million of value creation "based on reasonable and highly achievable cost synergies," such as expense savings, following some $146 million in transaction expenses.
But since Columbia's announced the deal, which it expects to close later this year, its stock price has stayed relatively flat — a signal that investors are cautious to hit the gas pedal before seeing results.
Some banks are also
In recent years, several acquisitions have been
This year, while the KBW Nasdaq Bank Index is up 2.76%, those four banks' stock prices are down 5.2%, 13.14%, 7.52% and 8.98%, respectively.
But even with the economic hang-ups, cutting deals now could still be better for the banks than sitting out, according to Sandler.
"What we're not looking at is what would have happened to the erosion of the combined deposit bases as standalone institutions, had they not executed that merger," he said. "This is about a war for deposits."
A recent deal involving a troubled Texas bank shows that even the most lopsided depository can find an exit.
Banks need leaders
The lack of a succession plan is one of the other most salient issues in bank consolidation, especially at smaller regional and community banks, Sandler and Poonawala said.
Henry Lacey, banking deal advisory leader at KPMG, said last week that across banks with fewer than $100 billion of assets, the CEO's average age is 69.
After the savings and loan crisis of the 1980s, the banking industry was radioactive to people just starting their careers, said Jacob Thompson, managing director of investment banking at Samco Capital Markets. Now, there's a "missing generation of bankers" in the workforce, he said.
Thompson said some institutions are willing to wait for a more seller-friendly market, despite the disadvantages they are currently facing.
"Even though they may have the management succession issues, even though they may have the underwater bond portfolio issues, they're content to sit and maybe try to wait it out a little bit longer," Thompson said.
