Banking M&A Likely To Rise?

Banks have traditionally used mergers to a great degree in order to grow their businesses. Size matters. Big banks have historically been winning and their big balance sheets are a large part of it.

The more deposits you have, the more loans you can give. The more loans you can give, the more interest income you can generate. Bigger balance sheets also help them stay afloat during crises and give them the ability to swallow up troubled smaller banks.

Large-cap M&A as of late has proved to be tricky due to a tough regulatory environment as seen by the failed TD/FHN merger. Increased regulatory scrutiny has led to prolonged deal closing times and increased uncertainty around approval.

In addition, rising rates has introduced a lot of uncertainty and made deal math tougher for those considering M&A.

The large unrealized losses on treasury securities have created a huge liability for any bank hoping to be acquired. After merging, these unrealized losses become realized making banks less keen to seek mergers for growth.

However M&A activity within the banking sector has been on the uptrend...

20 deals have been announced over $50M by the end of 1H compared to 15 in the entirety of 2023. The government has been encouraging smaller banks to merge post 2023 SVB crisis as evidenced by Treasury Secretary Janet Yellen.

The 50BP rate cut has slightly accelerated the timeline for mergers to begin picking up again. As rates fall over time and deal math begins to make more sense, M&A will be able to drive growth for many banks that may have been waiting on the sidelines.

Regionals will be the majority of this growth. There have been 0 banks over $100B in assets to become involved in whole bank M&A in the 1H. Investors may be inclined to be on the lookout for deals breaking out within the segment over the medium term. This flexibility may make them better prospects for investments going forward.