Is there a mad rush to consolidate the banking industry? The numbers would say no. Bank merger and acquisition (M&A) deal volume in the first half of this year is flat compared to the same time period last year. Aggregate deal value actually has fallen a little bit. Pricing on a tangible book value basis is flat.
That could soon change.
Investment bankers and attorneys attending Bank Director’s upcoming Acquire or Be Acquired conference in Phoenix, Arizona, say they are noticing a pick-up in deal-making discussions that could lead to actual deals in the second half of the year. In fact, the biggest deal of the year was announced in July when PacWest Bancorp agreed to buy CapitalSource Inc., both Los Angeles-based banks, in a combined stock and cash transaction worth $2.4 billion. If that deal had been announced in the first half of the year, aggregate deal value would have risen by about 50 percent.
The environment seems ripe for more activity: net interest margins and high regulatory costs are putting pressure on community bank balance sheets, providing incentives to sell. Buyers have seen stock valuations soar during the last year, which means more banks can afford to pay a premium to buy a bank and potentially overcome one of the biggest hurdles to M&A during the last few years: a lack of agreement between buyers and sellers on a price. Asset quality also has improved during the past year for both buyers and sellers. Capital levels at many banks are high. Basel III rules for U.S. banks and thrifts have been finalized, offering clarity on what capital levels will be required, therefore making it easier to do deals. In another sign of an improving economic environment, failed bank deals have been on the decline, and healthy bank deals have been taking their place.
The slow and steady economic improvement may be leading investors in publicly traded banks to turn their attention away from price to tangible book value metrics, and looking more at earnings accretion and growth potential in M&A deals. Still, regulatory concerns and compliance issues are having more of an impact on M&A than during the financial crisis, when the focus was on asset quality. Both buyers and sellers need to assess the potential for regulatory problems in any M&A deal, as well as closely assess the potential synergies and growth opportunities resulting from a combination. Banks in general are cautious, and investment bankers and attorneys are shying away from predictions of a coming wave of bank M&A. Instead, many predict slow but growing consolidation.
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