Will bank M&A activity thaw out in 2021?
Bank deals have been in deep freeze due to Covid-19 and the related economic downturn, but most of the executives and directors responding to Bank Director’s 2021 Bank M&A Survey, sponsored by Crowe LLP, say their bank remains open to doing deals.
More than one-third say their institution is likely to purchase a bank by the end of 2021; this represents a significant decline compared to last year’s survey, when 44% believed an acquisition likely in 2020. Branch and loan portfolio acquisitions also look slightly less attractive compared to a year ago.
The barriers to dealmaking may prove difficult to surmount in today’s uncertain economic and political environment.
With pressures on small businesses and the commercial real estate market exacerbated by remote work and social distancing measures, the recovery of the U.S. economy – and bank M&A – may hinge on conquering the coronavirus. In response, bank leaders are focused on credit quality: 63% point to concerns about the quality of a potential target’s loan book as a top barrier to making an acquisition, up significantly from last year’s survey (36%).
Despite concerns about credit quality and profitability, 85% say their bank is no more likely to sell due to Covid-19, and just 7% regret that they didn’t sell before the current downturn, when target banks could expect to command a higher price.
This willingness to carry on and weather these challenges may find its foundation in respondents’ long-term expectations. More than half anticipate a slow rebound for the U.S. economy. Twenty-eight percent don’t expect to return to pre-crisis levels in 2021, and 7% believe the recession will deepen.
Still, half believe that when the crisis abates, their bank will be just as strong as it was earlier this year. Forty-four percent express even greater optimism, believing they’ll emerge even stronger.
More than half (57%) believe their bank’s loan loss allowance will be sufficient to cover expected losses over the next 12 months. Two-thirds say that less than 5% of residential mortgages will default and 64% that less than 5% of commercial loans will default.
Willing to Pay for Quality
When describing their bank’s acquisition strategy, 44% indicate that they seek strategic acquisitions, regardless of price. One-quarter look for low-priced acquisitions of historically well-run banks; 27% are comfortable paying a premium for well-managed banks.
Tech Acquisitions Rare
Just 11% believe they’ll purchase a technology company. Of these, 63% express interest in buying a business or commercial lending platform; 63% are open to acquiring a consumer deposit-gathering platform. Almost half seek data analytics capabilities.
Price Remains a Barrier
Potential acquirers’ concerns about pricing as a barrier to dealmaking have dropped significantly – from 72% last year to 60% in this year’s survey. However, more respondents express concern about their ability to use stock as currency in a deal, as well as demands on their capital should they acquire.
Effects on Capital
Most believe their bank’s capital levels are sufficient to weather the economic downturn, assuming a rapid (98%) or slow (98%) recovery in 2021, or mild recession (97%). Eighty-one percent believe they can weather a deeper recession. Just one-quarter plan to raise capital over the next six months.
High Marks for Trump
An overwhelming majority award President Trump’s administration positive marks for the rollout of Paycheck Protection Program loans (90%) and stimulus payments (91%), and its support of the U.S. economy (88%). Two-thirds believe the administration has effectively responded to the pandemic.
To view the full results of the survey, click here.