How does the financial sector M&A landscape look at the end of Q1 2024?
Vito Sperduto: Financial institutions generally make up about 10 or 11% of overall M&A volume globally. Interestingly, in the U.S. last year it was slightly up, but it wasn’t a big number.
Vinnie Badinehal: As each company thinks about how to be competitive for the long term, they do care about scale, and they look at M&A as one of the options to achieve that scale.
The U.S. and many global markets still haven’t seen the extent of consolidation that people thought they would have seen by now. A year ago, everyone felt very bullish about pursuing M&A. But the impact of rising interest rates had a tremendous impact on balance sheets.
Jason Braunstein: You had rising interest rates, great credit quality – sort of a dream scenario for banks. At the same time, you’ve had the failure of some of the most storied franchises in the sector.
Badinehal: After the takeover of Credit Suisse by UBS, people were wondering who would be next. But the sector has been resilient through some of these challenges. Many players have strengthened their balance sheets and worked through the liquidity issue.
“Many players have strengthened their balance sheets and worked through the liquidity issue”
Vinnie Badinehal, Head of Financial Institutions
What are the implications of current forecasts on interest rates?
Sperduto: Our U.S. Rates Strategy and Economics team had been expecting rate cuts to start in June, with about 125 basis points of cuts in 2024. They still expect the June start, but as opposed to monthly cuts, it’s going to be quarterly cuts, and they’re expecting cuts of 75 basis points.
Badinehal: I think the potential of three cuts is probably a positive scenario. If the Fed manages a very soft landing, we remain more bullish that as we get through some of these issues, including the macro and geopolitical and election cycles, we should see a pick-up in M&A.
Braunstein: I think people are preparing for a longer higher-rate environment, which I think is going to be the case, and funding costs are going to rise. Margins will shrink, business will slow. But if we can maintain credit, the sector will be just fine.
“Margins will shrink, business will slow, but if we can maintain credit, the sector will be just fine”
Jason Braunstein, Head of Financial Institutions M&A
What’s the effect of enhanced regulatory scrutiny?
Grafstein: Financial institutions are one of the industries under intense scrutiny. At times the regulatory attitude to consolidation feels a little ambivalent.
Badinehal: Certain players feel they do not want to be exposed to the lack of clarity. However, a number of players are feeling they need to be more open-minded and just maintain an active dialogue.
Braunstein: I do think the Fed and the OCC are more open to M&A than people think. M&A was clearly a solution to Silicon Valley, First Republic, and others. I think the bigger risk today for banking sector M&A is the DOJ. That’s amazing to me – I don’t think the banking sector lacks competition.
Sperduto: Traditionally in a situation like this, you go in with a remedy: a package of branches or locations, or a business your will divest, to solve the issue.
I think there’s been a greater hesitation – especially on the part of the FTC, and as a result the DOJ as well – to accept that remedies are going to make it work from a competition perspective. They start off in a very skeptical position.
“There’s been a greater hesitation to accept that remedies are going to make it work from a competition perspective”
Vito Sperduto, Global Head of M&A
What are the prospects for future consolidation in the industry?
Larry Grafstein: The U.S. has a slightly different industry structure than many advanced economies. We spend a lot of time talking about the biggest banks, but we have hundreds of smaller banks, so it’s almost a bifurcated industry.
Braunstein: Because of the number of banks we have, it’s just impossible to properly regulate them. The smaller institutions are less complicated. The enhanced supervisory environment for banks as they reach the $100 billion threshold has become very onerous; very few banks have crossed that threshold successfully.
I do believe this sector will look dramatically different in the next couple of decades. There will be much larger, trillion-dollar banks – the regulators will realize that’s the right thing for the system. There will be a lot of smaller banks, which play a role in local communities. It’s the regional banks in the middle that I think will suffer the most pain and will consolidate into larger institutions.
“The enhanced supervisory environment for banks as they reach the $100 billion threshold has become very onerous”
Jason Braunstein, Head of Financial Institutions M&A
Are deal volumes set to pick up?
Sperduto: My sense is that we’re going to have a strong 2024 in financial institutions M&A, but it’s really going to be 25/26 and thereafter that we’re going to see a steady pick-up. As I’ve said recently to clients, this isn’t a matter of flipping a switch: it’s going to be a steady build.
Badinehal: What we’ve seen recently is event-driven M&A. People are going through certain challenges – regulatory, balance sheet, credit – and need to pursue M&A as a potential solution. On a macro perspective, the drivers of M&A are certainly medium to longer term.
Braunstein: We’re typically used to seeing 300 bank deals announced a year, most of them very small. There has been a dramatic slowdown in that: it’s probably close to 100 deals last year. The smaller deals will come back: we’ll rebound to 200 or 300 deals a year.
However, there has been a lot of consolidation over the past three years – probably more $100 billion-plus deals than in a very long time. I realize some of them are FDIC failed bank situations, but that’s consolidation.
“On a macro perspective, the drivers of M&A are certainly medium to longer term”
Vinnie Badinehal, Head of Financial Institutions