Time is right for a wave of bank consolidation

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.

Three core drivers sparking bank consolidation

1. A 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.

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.