A record number of deals is on the horizon as uncertainty from the COVID-19 pandemic clears and banks feel more comfortable in the wake of a flurry of M&A announcements in late 2020, analysts and deal advisers said.
Banks shifted their focus to internal operations when the COVID-19 pandemic came to the U.S., and M&A fell to the near-bottom of bankers' priorities. Some announced deals were terminated or delayed, and many discussions were paused. Deal volume was down more than 50% in 2020, with only 112 deals announced during the year, compared with 258
"2021 is going to be a massive year for M&A," Brady Gailey, an analyst for Keefe Bruyette & Woods, said in an interview. "COVID has pushed us to the fact where we need more deals, we need more consolidation and we need more scale."
In the final few months of 2020, several regional banks announced large, transformational tie-ups. In October, First Citizens BancShares Inc. announced its merger of equals with CIT Group Inc. On Nov. 16, 2020, PNC Financial Services Group Inc. announced its acquisition of BBVA USA Bancshares Inc., marking the fourth-largest U.S. bank deal since 2007. Less than a month later, Huntington Bancshares Inc. announced its acquisition of TCF Financial Corp. These notable deals toward the end of the year are a signal that banks are getting more comfortable with M&A, Gailey said.
"You kind of need that first domino to fall to have bankers start getting more comfortable," Kirk Hovde, head of investment banking for Hovde Group LLC, said in an interview. "As bankers see activity when they're talking to their boards, it's easier as a board to make a decision to do something when you're not the only one out there doing it."
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More clarity around the election, credit quality and vaccines have paved the way for M&A to return to pre-pandemic levels, experts said, but they differ on when the wave will come.
"The uncertainty with the election behind us, the vaccine being out and then some pickup in valuations has definitely spurred further discussions," Hovde said. "We are seeing more activity right now."
Mark Kanaly, a corporate and finance lawyer at Alston & Bird LLP, expects deal volume to return to pre-pandemic levels in the summer. "M&A will become a priority again soon," he said. "It's easy to see that we will return to some degree of normal here before too long."
Hovde expects deal announcements to pick up slightly after the second quarter, but he is unsure if the eventual M&A wave from the pent-up demand during COVID-19 will happen in 2021 or 2022.
"I don't know if 2021 will ultimately be a record year for a number of deals that get done. But whether it's 2021 or 2022, you're going to see a large amount of deals happening over the next few years," he said. "I think we're going to see five years of deals in a two- to three-year span."
When the rush of deals does happen, experts anticipate more regional bank tie-ups similar to those announced toward the end of 2020 and MOEs among banks of all sizes as the need for scale intensifies. 2019 marked a record year for large bank MOEs, while 2020 saw an uptick in community bank MOEs. The synergies that MOEs provide amid the tough operating environment will drive the ongoing trend into 2021, experts said, and Kanaly expects increasing interest in MOEs among small to midsized banks in the new year. Rumors that HSBC Holdings PLC is considering a sale of its U.S. retail bank might pique the interest of some regional banks looking for a transformational deal.
"The MoE strategy could help institutions cut costs as the two parties involved in the transaction consolidate their branch networks, rationalize technology budgets, [and] transform their businesses," PwC wrote in its "Banking and Capital Markets deal insights: 2021 outlook." "In a prolonged low interest rate environment, many firms could view this as their road to higher profits."
