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Explosive M&A?
A lot of people are predicting that bank M&A will improve in 2024. After all, it couldn’t get much worse.
The valuation firm Mercer Capital found that deal volume in 2023 hit a low not reached since the last financial crisis of 2007-08. On an absolute basis, there were only 96 transactions year-to-date through Dec. 21, 2023 — the lowest level since 1990, the year Mercer began tracking. But as banks merge and disappear over the decades, the true measure is the percentage of the industry that gets acquired every year, and that stood below historical averages, too. It was near 2% in 2023, whereas the average is about 3% to 4%, says Jay Wilson, senior vice president at Mercer.
The banks that did sell took prices on average that were lower than even the height of the Covid-19 pandemic in 2020. The price-to-tangible book value was about 128% year-to-date as of Dec. 21, down from about 150% in 2021 and 2022, and 134% in 2020, Mercer said.
As interest rates began to rise in 2022, bonds in securities portfolios fell in value. That resulted in higher levels of unrealized losses that made it tough to do deals. Public banks saw their stock valuations crater early in 2023, cutting into the currency banks typically use to buy other banks. And the majority of respondents to Bank Director’s 2024 Bank M&A Survey said they’d sell for 175% of tangible book value or more. “There’s still a lag between what buyers and sellers want,’’ says Rick Childs, a partner at Crowe LLP, which sponsored the survey.
All that is to say: The environment was terrible for dealmaking last year. But is that about to change?
If interest rates continue to decline, the hit from unrealized losses in bond portfolios should improve; some banks have been selling off pieces of those portfolios, as well. Stock valuations got a lot better during the tail end of last year. Mercer has predicted a “potentially explosive” market for M&A if the favorable environment is sustained, which could require the Federal Reserve to follow through on expected cuts to the federal funds rate.
It’s impossible to say whether that will happen. But if history is any guide, dealmaking improves after lulls — and we’ve certainly seen a lull.
Almost any level would look better than last year.
• Naomi Snyder, editor-in-chief for Bank Director
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