Motivation for Mergers Will Grow as Interest Rates, Loan Growth Stay Low

The pace of announced mergers among rated U.S. banks has accelerated and is likely to gain steam.

The limited prospect of material loan growth makes asset growth via mergers and acquisitions increasingly attractive. And as we anticipated, more banks are favoring large transformational deals. We expect the industry will continue to consolidate in the second half of 2021. Greater size and efficiency will remain primary drivers of consolidation in the face of continued low interest rates, as will the imperative to invest in new technologies at scale.

• There was a substantial jump in transformational M&A activity during the second quarter. Four sizable deals were announced in the period, and each envisions an enlarged entity that benefits from greater diversification and economies of scale. All four transactions promise eventual benefits for creditors, but each presents significant execution risk that is an immediate credit negative.
• The main drivers of consolidation will continue for the next 12 to 18 months. Interest rates are unlikely to rise until 2023, increasing the likelihood of a jump in M&A activity. Technology upgrades will require substantial investment, which prospective cost savings from acquisitions can help fund. And loan growth will remain subdued because of the massive deposit holdings of U.S. companies and households.
• Difficulty forecasting business activity and loan growth, as well as rising bank share prices, may have held back some deals. The value of an acquisition target is harder to gauge in an uncertain economic and market environment, which likely helped slow overall sector consolidation in 2020 and first quarter 2021, but nonetheless did not prevent the prominent deals we highlight in this report.