2019 Banking and Capital Markets M&A Outlook

Will it be a stellar year for banking and capital markets mergers and acquisitions?

What will the year bring for banking and capital markets mergers and acquisitions? The drivers that were favorable for bank M&A in 2018—tax reform, increasing interest rates, and a business-friendly regulatory environment—continue to make a strong showing. However, certain economic signals may foreshadow a downturn as soon as 2020. Our 2019 M&A report delves into banking M&A trends and expectations for the year ahead.

Opening the door for M&A activity

While macroeconomic trends were positive throughout 2018, deal making did not reach the level expected. There were a few big deals in banking M&A; specialty finance, investment and wealth management held steady; and fintech showed a slight decrease over the previous year.

Entering 2019, late 2018 stock market gyrations have put many organizations on edge; however, they may see an upside in 2019 as lower valuations entice sidelined buyers to engage in deal making, especially those who have seen their stock prices increase in value relative to peers. Tax reform, business-friendly regulatory environment, increasing interest rates, and ample capital levels look to remain in place. Meanwhile, building macroeconomic pressures—including being deep into the current market cycle—may foreshadow a potential downturn as soon as 2020.

As organizations contemplate both market opportunities and uncertainties, they will need to decide: Is the 2019 the time to shed assets we don’t need, buy capabilities we want, and get our M&A house in order?

Download the 2019 outlook to review 2018 banking M&A activity, explore expectations for the year ahead, and identify trends that organizations need to keep an eye on throughout 2019. Visit the banking and capital markets page for broader industry insights, analysis, and resources.

Drivers of M&A bank trends

The following trends and drivers are worth watching for their potential catalyzing—or hindering—effect on banking M&A activity during the coming year.

Smaller regionals. Banking M&A at the smaller regional level may be a catalyst for broader M&A action. Many larger regional players have remained on the sideline as they reassessed their market position and strategy to maximize shareholder value. Market conditions could be priming the pump for ramped up regional bank M&A in 2019:

  • A lowered corporate tax rate has lifted bank earnings and is leaving many regional banks flush with cash
  • A shift in the regulatory landscape is sparking interest in M&A
  • Increasing interest rates are providing improved yields to investable assets
  • Competition for deposits is spurring M&A activity among regional and community banks

Several community banks have grown their asset base significantly over the past three to four years through acquisitions. We expect this trend to move moderately upmarket, with larger community players focused on adopting this strategy. They should prepare to move quickly and decisively because, depending on the market, the number of targets that meet their appetite might be shrinking.

Tax and regulatory relief. The US tax reform bill, signed into law on December 22, 2017, lowered the US corporate tax rate to a flat 21 percent and provided a considerable lift to first-quarter 2018 bank earnings. As a result, many banks (primarily national and regional players; less so community banks) were extra flush with cash in 2018 to invest internally or in capital activity including M&A.

Also serving as a banking and capital markets M&A enabler: business-friendly regulations. Actions that support potential banking and capital markets M&A include: modernization of Community Reinvestment Act (CRA) regulations, increasing regulatory events around anti-money laundering (AML) programs, and the establishment of a fintech regulatory framework.

Digital decisions. Build, buy, invest, partner? Banking and capital markets organizations have been eyeing and pursuing numerous options to secure the digital capabilities they need to differentiate and grow. We expect their digital decisions in 2019 to further evolve financial institutions’ relationship with fintechs and strengthen their position against the anticipated market entry of the world’s largest technology companies.

Early in the digital era, many financial institutions may have looked upon fintechs as unwelcome market disruptors or threats to their customer and revenue base. Today, most have pivoted to more engaged and proactive collaboration. Many financial services firms are looking not merely to keep up with how fintechs are changing the industry; they are looking to become major players in shaping, financing, and using financial technology to fuel their own reinvention and growth.1

Planning for continued banking M&A success

Recent M&A scenario planning likely has reflected upside influences including a sustained bull market, tax reform, interest rate increases, competition for deposits, digital investments, and pro-business regulations. In 2019, we expect that many of these positive factors for continued bank M&A will remain in place.

However, signs of a potential credit cycle turn/economic slowdown as early as 2020 are increasing. To prepare, banks, PE firms, and other financial institutions should model both the upside and downside impacts of the following issues in their strategic planning:

  • Tax relief may turn out to be more a hindrance than a boon.
    Fewer companies are borrowing from banks because they are flush with money. Is it a short-term blip as tax relief works its way through the system, or an indication that companies are stockpiling capital and avoiding leverage as a hedge against coming potential recession that may depress growth and valuations?
  • The post-election stock market boost has slowed. The market has moved on from the post-election stock market appreciation to tracking banks’ individual performance and reflecting that in the stock price. Although some valuations remain on the high side, continued market choppiness is creating pressure on company leaders considering M&A in 2019 to set their plans in motion. However, many banks remain on the fence about buying or selling. To aid decision making, executives should consider what their performance indicators are saying about the health of the business: Banks with stock price valuations above peers, strong efficiency ratios, and a secure, strong capital base may look for value-priced acquisitions that are available both pre- and post- downturn to, in part, monetize the valuation delta now.

    Conversely, banks with a more limited capital base, poor stock values relative to peers, and a portfolio susceptible to tightening credit and loan defaults in a downturn may decide to act and sell to a large regional bank or foreign buyer looking to expand their footprint in 2019.
  • Competition for deposits is heating up. As interest rates have continued to move up, competition for deposits among banks, money market funds, and other short-term investments has intensified. Deposit betas (the change in deposit interest rates relative to the change in market interest rates) are increasing, banks’ ability to grow deposits is becoming more difficult, and the long-expected margin expansion is surprisingly hard to provide. Banks that can navigate this rate should emerge as better-positioned acquirers via their stock currency or sellers through the attractiveness of their funding base and associated spreads.
  • Too many deals could lead to a bottleneck. A supportive regulatory environment that opens the door to increased M&A may, ironically, create a deal bottleneck. Regulators only have so many resources to process applications and review diligence to facilitate merger approvals. Deal planning should factor in the possibility of regulatory review delays.

These factors bear watching as banks and other financial services organizations progress through their strategic M&A planning. The resulting decisions—to be buyer, seller, or sideline observer—may tip the balance in favor of a stellar year for M&A or, conversely, a waiting game for economic clarity.

Organization leaders should remain alert to potential opportunities and have the tools, teams, and processes in place should M&A planning move to action. Firms that develop and hone these competencies today can be well positioned to execute the right deal tomorrow.

To learn more, download the 2019 Banking and Capital Markets M&A Outlook report.

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Closing the gap in fintech collaboration: Overcoming obstacles to a symbiotic relationship. Deloitte Center for Financial Services, 2018.