The current environment is highlighting the value of scale and should encourage more bank M&A activity, including larger transactions, according to KBW CEO Tom Michaud.

The downturn in 2020 has weighed on bank M&A activity, on pace to drop 57% from year-ago levels. Lower bank valuations certainly have not helped stoke more deal activity, but Michaud said recessions are never a good time for healthy bank M&A given concerns about credit quality. Michaud, president and CEO of Stifel Financial Corp. unit Keefe Bruyette & Woods Inc., said in the latest "Street Talk" podcast that the environment could change. He believes bank stock valuations will be higher a year from now and noted that many of the factors driving deals before the pandemic are only accelerating as institutions are seeking to achieve greater scale to invest in technology and become more efficient.

"I believe you'll see consolidation, and it will be to try to build better competitors and better banks to take on some of the biggest banks that are in the market today and the very powerful technology companies that are trying to find their way into banking," Michaud said in the episode.

PNC Financial Services Group Inc. and Huntington Bancshares Inc. both touted the importance of scale when announcing their respective acquisitions of BBVA USA Bancshares Inc. and TCF Financial Corp., the two largest deals unveiled in 2020. Huntington said the deal with TCF will increase scale and growth, allow for branch consolidation, and accelerate digital investments and capabilities across a broader platform.

Michaud's firm KBW advised TCF on its $6.0 billion merger with Huntington. He said in the episode, recorded a few days before Huntington announced the deal, that he believes there will be a rapid acceleration in branch closings. When two banks merged years ago, they would focus on branches within one mile of each other to measure overlap, he noted. In an increasingly digital world, that circle can be much wider and possibly up to five miles apart, he said.

"I think many of the branches that have been closed for the pandemic will never reopen," Michaud said.

Michaud said the movement toward digital engagement was accelerated by several years by the pandemic as the stay-at-home economy forced banks and their customers to run toward digital adoption. Low rates also encourage consolidation because they limit revenues and push banks to become efficient. Michaud believes those factors will increase institutions' interest in spending on technology, reinforcing the need to gain scale.

The executive further noted that the creation of Truist Financial Corp. through the merger of BB&T and SunTrust changed the competitive landscape. Prior to that transaction, he said the four largest banks in the U.S. — JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. — were running away with deposit market share. He said a number of superregional banking companies looked at the investments in technology made by JPMorgan and BofA, considered the changes in the mass consumer market, and decided that they needed scale to go "toe to toe." He noted that PNC acquiring BBVA represents a big step in that shift.

"I think there'll be more of that. I think that's good for the industry, and I think it's good for the economy because you don't want to have so much market share just sitting in four banks' hands. I think it would be good for the economy, good for innovation, good for the industry to see more of that big bank competition, and I personally think it's going to happen," Michaud said.

That competition will also have an impact on smaller institutions. Michaud noted that nearly 87% of the approximately 5,000 banks in the U.S. have less than $1 billion in assets. He said those banks will have to focus on what they can really excel at and distinguish their offerings.

"I think unless they have terrific technology partners that can help them meet the market on the consumer side, the consumer products are going to become more and more digital driven, in my opinion, and scale and technology are probably going to lower the cost to the consumer. And the smaller banks are going to have to really think about what niche it is or what service are they going to provide that's going to really distinguish them," Michaud said.