Bank M&A activity fell considerably in 2022, but the push to obtain core deposits should encourage a steady stream of deals in 2023 as funding becomes more precious.
Through Dec. 26, 2022, 167 bank deals have surfaced this year, down nearly 22% from 2021, while the aggregate deal value has plunged more than 70% year over year amid a dearth of larger transactions. Bill Burgess, co-head of financial services investment banking at Piper Sandler — which has advised on 41 bank deals in 2022, more than double the transactions reported by the next-closest adviser — said in the latest Street Talk podcast that he is bullish that roughly 200 transactions could surface in 2023. Burgess expects to see more and more acquirers bolster their deposit base through M&A, particularly with core deposit premiums near decade lows.
"With loan-to-deposit ratios now in the mid-90s, core deposits are starting to matter. And frankly, [core deposit premiums] should be more expensive than they are," Burgess said. "They're cheap relative to the other liquidity alternatives for the buyer universe."
Banks are expected to see upward pricing pressure on all deposits in the coming quarters. Higher deposit costs will follow growing liquidity pressures as strong loan growth and deposit outflows have caused loan-to-deposit ratios to rebound. At the same time, banks' access to liquidity from their securities portfolios has arguably declined, with the majority of bonds they own now underwater.
With liquidity in focus, Burgess said his firm is spending more time looking for sellers with low loan-to-deposit ratios as well as targets with liquid assets or mortgages that can be sold for funding. He called a $1 billion bank with a 50% loan deposit ratio an "invaluable battery" to plug into institutions that do not want to slow commercial loan growth since they are currently seeing fantastic loan yields.
While an acquisition can bolster a bank's funding at a time of growing liquidity pressures, some headwinds to deals remain. Burgess identified two key factors restricting M&A today: the uncertain regulatory outlook and fears of a potential recession on the horizon.
Burgess said the regulatory world has changed for larger institutions, which now face longer closing periods for deals. He noted that deals with values over $500 million have taken 290 days or more to close.
While institutions wait for transactions to close, they face potential customer and employee fallout. Burgess further noted that large buyers face an opportunity cost to pursue deals, given how long it takes to close. He pointed to U.S. Bancorp's purchase of MUFG Union Bank and Bank of Montreal's announced plans to acquire Bank of the West as examples. The U.S. Bancorp/Union Bank deal took more than a year to close, while the BMO/Bank of the West transaction has been pending for just over 12 months.
Burgess said those buyers likely will take another year to integrate the acquisitions, meaning they might ultimately be on the sidelines from other deals for nearly three years after announcing their transactions. With that in mind, Burgess said buyers "better make sure" that any target is among the top two or three on their list because if their first choice calls them three months after they announce a deal about a potential transaction, they likely will not be able to act on it for several years.
"Opportunity cost was obvious for the larger transactions and it's becoming more important even for the smaller transactions, where having more than two regulatory applications with the Fed probably is going to be challenging unless you are a well-experienced acquirer with uniquely superb regulatory relations," Burgess said. "It really has, in some ways, stopped the larger transactions."
A heightened risk of a recession and the likelihood of elevated credit losses that could follow would put the brakes on most transactions in the near term. However, Burgess said if current conditions continue, with credit holding steady and loans growing at a quick clip while banks experience deposit outflows, he expects roughly 4% of the banks in the industry to consolidate.
"No one wants to catch a falling knife. And thus far, we're seeing no real cracks in credit," Burgess said. "If that starts to change, I think people will hit the brakes because no one wants to be the last buyer of a $10 billion asset bank the day before the crisis on credit began."
"Street Talk" is a podcast hosted by S&P Global Market Intelligence.
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