Why experts bet on mergers and acquisitions of financial institutions

Interest rates and other conditions are setting the stage for more bank acquisitions this year.

By Calvin Trice and Jeff Sheban

Banking transactions are expected to return to flat volume this year as investor confidence in bank stocks is restored and rising interest rates provide more incentive for large buyers to acquire assets, transaction advisers said. Merger Market.

Inviting targets include smaller banks that cannot achieve the scale needed for satisfactory returns for shareholders, as well as some of the larger U.S. regional banks, especially those in Sunbelt markets with growing populations, they said. .

The Federal Reserve’s plan to calm inflation with higher interest rates will further strengthen bank balance sheets, putting buyers in an even better position to grow through acquisitions.

Growth in bank stocks is fueling demand

Banking stocks entered 2022 as one of the strongest in the stock markets. Shares of big banks trading at twice tangible book value, a smaller one whose stock is trading at 1.8 times book value will be an attractive target, said R. Lee Burrows, vice president of the bank. investment fund at Performance Trust Capital Partners. (Price to tangible book value is the price at which a bank’s stock trades relative to the value of its tangible assets, including deposits, loans, and branches.)

“Medium-sized banks between $10 billion and $100 billion in assets, for the most part, have very strong currencies, [and] very high stock prices,” Burrows said. “They are going to be inclined to use this currency to make acquisitions that may be financially attractive.”

With the promise of a significant rise in interest rates for the first time in years comes the potential for wider profit margins, which should drive up stock prices and with it the likelihood of buying, a- he declared. The Biden administration and some members of Congress have dampened the outlook for deal activity by saying the feds should block mergers between the biggest banks, said Eric Corrigan, senior managing director of Commerce Street Capital.

“For most transactions that won’t be a problem, but if someone tries to do something really big, I don’t know if it will. [be approved],” he said.

Sunbelt ripe for mergers and acquisitions

Increased trade activity will come with regional biases. Texas is on the verge of a strong mergers and acquisitions era, said Kamal Mustafa, president and founder of Invictus Group. The state’s economy is dynamic and includes a number of banks approaching the $1 billion and $5 billion in assets thresholds, where factors such as economies of scale, regulatory costs and profile of the transaction encourage a sale in the absence of sustained growth, Mustafa said. “If they don’t see themselves getting there, it’s time to cash in,” he said.

Florida and Georgia should see more business activity because consolidation in the Sunshine State has matured to the point where a few large regional banks have begun to encroach on each other. Many have found fertile ground for acquisition in northern Georgia, Mustafa said.

Other types of acquisitions are cooling off, Mustafa noted. In Midwest farm lending, for example, many local farms have been consolidated by large corporations that do business with the big nationals. On the West Coast, the smaller banks have all but disappeared, and the remaining banking centers are too remote and geographical to warrant much M&A activity, he said.

Request from north of the border

Sellers could once rely on offers from overseas buyers to boost transaction multiples, but Asian and European banks have mostly exited the U.S. market because the domestic regulatory environment depressed yields, Commerce Street’s Corrigan said. . Only Canadian buyers remain.

Two Canadian banks, the Toronto-Dominion Bank and the Royal Bank of Canada, each have assets of over $1 trillion and are larger than all but four US banks. Three others – Scotiabank, Bank of Montreal and Canadian Imperial Bank of Commerce – rank among the twelve largest banks in North America with assets ranging from $660 billion to nearly $1 trillion.

In December, BMO announced it was buying San Francisco-based Bank of the West from BNP Paribas for $16.3 billion, while in February TD announced it was acquiring Memphis-based First Horizon. , for 13.4 billion dollars, a decision that will make it the sixth. largest bank in the United States by assets. Bank of the West has assets of $105 billion compared to First Horizon’s $89 billion.

The CEO of a publicly traded US bank said Merger Market that he would not be surprised to see other US regional banks fall into the hands of the largest Canadian banks, namely Regions Financial, based in Birmingham, Alabama, with assets of $163 billion; Dallas-based Comerica with assets of $95 billion; and Synovus, based in Columbus, Georgia, with assets of $57 billion, as potential targets. “People love the South and Texas, and those are the banks that would be on someone’s radar screen,” the CEO said.

Another possibility with more exposure to the Midwest and industrial economy would be Columbus, Ohio-based Huntington Bancshares, with assets of $174 billion, the CEO said, adding that larger regions are more appealing to Canadians than many smaller targets because “it’s too much trouble to string together a bunch of small cases.

Calvin Trice covers financial services for Mergermarket and can be contacted at [email protected]and Jeff Sheban is a writer and editor for Mergermarket and can be reached at [email protected].