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Time is right for a wave of bank consolidation

There’s a shift toward mergers of equals

In the last decade, regional banks have been focused on buying new capabilities and not on mergers & acquisitions (M&A). But recent market shifts might bring M&A banking to the forefront, creating a host of additional considerations.

The next wave of M&A banking

Regional and super-regional banks have been active acquirers over the past decade, primarily focused on buying new capabilities, such as financial technology (fintech), brokerages, and investment management firms. However, until recently, banks had shied away from growth-focused mergers of equals (MOEs) and other large-scale acquisitions.

Recent regulatory and marketplace changes, including the relaxation of provisions of Dodd-Frank are beginning to change this paradigm, shifting how we see the banking landscape evolving. As banks begin to view larger deals, they’ll need to change the lens with which they approach and execute on them.

Shifts in the market have led to fee pressure and commoditization, increasing the value of scale. When coupled with a favorable regulatory environment, as well as updated economic indicators suggesting continued economic expansion, it will likely serve as a catalyst for bank consolidation. Analysts and market advisers increasingly believe that the next wave of MOEs across regional and super-regional banks is upon us.

Time is right for a wave of bank consolidation

Three core drivers sparking bank consolidation

  1. more favorable regulatory environment
    The 2018 Economic Growth, Regulatory Relief and Consumer Protection Act raised the asset thresholds that trigger added regulatory scrutiny from $50 billion to $250 billion. This unlocked a range of growth opportunities that were previously out of bounds for banks wary of taking on the cost and burden of Comprehensive Capital Analysis and Review (CCAR) in addition to the incremental quantitative capital and liquidity requirements.

    This, coupled with more openness in regulatory positions taken recently by the regulators, has produced a greater willingness among banks to consider mergers, especially if the candidates are able to demonstrate that the “Joint Co.” will strengthen financial and risk readiness.
  2. The need for scale to improve efficiencies and competitiveness
    Commoditization of services, ongoing interest rate compression, and regulatory limitations on fees have depressed banking revenues even while the economy remains strong. This has increased the need for scale-driven efficiencies and digitally driven growth focused on improving banks’ operating expenses and strengthening their competitive positioning.

    Concurrently, newly reduced corporate tax rates have provided an increase in available cash, delivering the power needed to consider larger acquisitions that can drive synergies and reduce operating expense.
  3. The hunt for digital capabilities
    As banks’ desire to differentiate via technology and digital channels grows, the number of available and differentiated fintech targets has commensurately become harder and more expensive to find. Ongoing demand for fintech targets has continued to outpace available supply driving up multiples.

    As a result, interest in digitally mature banks has also increased. Such targets represent an integrated portfolio of fintech capabilities and may likely be a more efficient inorganic growth opportunity for a bank, rather than hunting for unique capabilities on a piecemeal basis. Moreover, acquiring a digitally mature bank also helps add scale and can attract top talent, all of which can be leveraged to further differentiate legacy banks.

So, what will the impact be? The expected wave of bank consolidation is likely to produce a small but strong tier of super-regionals well-positioned to operate within a landscape of growing pricing pressure and differentiated customer experience. However, as the pace of bank consolidation increases, the pool of desirable—and available—MOE partners may become limited. Regional banks considering a large-scale acquisition or MOE should therefore move quickly and strategically.

Mergers of equals has “more of everything”

In contrast to smaller fintech buys, MOEs typically have more of everything: More deposits, branches, customers, lines of business (LOBs), employees, systems, regulatory exposure, and risk. As a result, acquirers may have to manage a host of additional considerations, not least of which is understanding how to integrate new digital capabilities, retain customers and employees, and manage regulatory concerns that may require divesting assets. The increased complexity of an MOE deal calls for additional diligence and planning across six priority areas :

Considerations to enhance future M&A banking

Given the limited number of large-scale acquisitions and MOEs over the past decade, potential acquirers might be rusty when it comes to M&A strategy, planning toolkits, and access to experienced talent. As banks start to think about the next wave of bank consolidation, a few considerations may enhance their outcomes:

  • Think broadly broad about the opportunity set. Develop an understanding of where you want to focus your growth and what attributes you’d like to see in a potential target based on their potential value-add to operations, customer experience, and capabilities (including digital) to develop the universe of targets. Only once you’ve developed a broad opportunity set should you begin to tailor the list down to a short-list of targets to consider.
  • Understand how you’re being viewed. An MOE isn’t only about the diligence you do on a potential acquisition. It’s also about how your potential targets view you and the opportunities, culture, and capabilities you will bring to the table. Conduct sell-side diligence on yourself and evaluate areas of potential vulnerability that can be addressed before engaging in conversations with a potential target.
  • Quickly evaluate M&A readiness and capabilities needed for the deal. Deal teams should review their internal capacity and capabilities to identify gaps and areas for support before engaging a potential target. External deal support should be leveraged to plug capability and talent gaps and help accelerate and de-risk potential acquisitions, particularly when approaching a target of material size.

“Conduct sell-side diligence on yourself and evaluate areas of potential vulnerability.”

Considerations if M&A banking has already begun

If merger discussions are already underway, banks should:

  • Stay in close contact with regulators. Deal planning should include early and frequent engagement with regulators to demonstrate both banks’ understanding of the regulatory requirements and show how the Joint Co. will enhance financial and risk readiness.
  • Establish a robust decision-making process. MOE planning, execution, and integration decisions should be fact-driven with clear governance that delineates who holds ultimate decision-making power and how decisions are made as early as possible in the merger process.
  • Make sure the end result is not just bigger but better. A clear source of truth for the deal rationale and value drivers should be created, communicated, aligned, and executed on throughout the entire deal lifecycle.

If you’re thinking about acquisition readiness, target evaluation, or execution, or if you simply want to learn more about the trends driving the new wave of MOEs and how your bank may benefit, we should talk.


Nadia Orawski
Deloitte Consulting LLP

Anupam Shome
Senior Manager
Deloitte Consulting LLP

Richard Rosenthal
Senior Manager
Deloitte & Touche LLP

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