What will drive bank M&A in 2021

Last year was not the year to make a deal. But there are a lot of reasons 2021 might be.

Only 112 bank mergers were announced in 2020, down 60% from a year earlier and the lowest annual tally in nearly a decade, according to data compiled by Keefe, Bruyette & Woods. Several of those that were announced were ultimately terminated after the pandemic hit.

The reason for that is obvious — there was a pandemic and a recession. But as the COVID vaccine is more widely distributed and the pandemic begins to wane, the pressures driving mergers may come roaring back.

Three factors have fueled previous surges in bank M&A — low interest rates, a need to cut costs and the need to invest in technology. All of them were present before the pandemic and are present now — in fact, the pandemic may have made those pressures more acute.

“Consolidation is definitely in the winds,” said Stephen Curry, CEO of bank consulting firm Endurance Advisory Partners.

Here’s what will drive deal activity in the year ahead.

A need to cut more costs
The COVID-19 era has given all banks a greater sense of urgency to reduce their overhead costs, and that urgency could jump-start merger discussions.

Low interest rates have cut into net interest income, and there are concerns that fee income isnearing a plateau. That could force more banks to go out and find a buyer as the year progresses.

Half of the roughly 400 community banks surveyed by the Conference of State Bank Supervisors last year said the excessive cost of doing business was an important or very important factor for seriously considering an acquisition offer.

Most banks had already cut costs in 2019 and were running low-fat operations when the pandemic hit, said Stephen Scouten, an analyst at Piper Sandler. Several banks have announced a new round of branch closures in recent months, and persistent revenue pressure could lead more banks to turn to M&A to further cut costs.

“Cost savings and new efficiencies are always important in almost every deal, and I think that is especially true now,” Scouten said. “The earnings environment is, at best, tepid, so your focus is on expenses. For many, M&A is the next logical step on that front.”

Acquirers are equally eager to cut costs.

Huntington Bancshares’ pending $6 billion acquisition of the $48 billion-asset TCF Financial in Detroit, announced in December, is a prominent example. In addition to gaining scale and expanding into new markets, the $168 billion-asset Huntington plans to eliminate $490 million of expenses by the end of 2022.

Up to a quarter of the cost savings would come from branch consolidation. Almost half of TCF’s branches are within three miles of a Huntington branch, and consolidation would generate 18% earnings accretion for Huntington by 2022. Huntington also plans to eliminate overlap in equipment, consulting services and office space.

Cost reductions are a critical element of the merger, and Huntington Chief Financial Officer Zachary Wasserman said during a call to discuss the deal that the company’s goals were realistic.

“We track expenses on the department or team level and have deep accountability to ensure we deliver the expected synergies,” Wasserman said.

Overdue tech upgrades
As the pandemic has made plain, Americans are increasingly doing their banking business online. Social distancing measures forced branch limitations and ramped up online traffic, forcing banks of all sizes to reevaluate their cost structures — and that might mean merging.

Smaller banks are struggling to keep pace with the expansive technology spending of larger banks, said Chris Maher, chairman and CEO of OceanFirst Financial in Toms River, N.J. That creates a need to combine with peers or bigger regionals to create more cost-efficient digital offerings and loan products.

“Scale and tech matter — we all see it,” Maher said.

Three-fourths of community banks surveyed by the CSBS said an inability to achieve economies of scale played an important or very important role in their decision to seriously consider acquisition offers.

The $11.7 billion-asset OceanFirst, an active acquirer before the pandemic, completed two bank acquisitions early last year, adding $2 billion of assets that it leveraged to invest more in technology.

Bank consolidation will heat back up in 2021, says Chris Maher, CEO of OceanFirst Financial. “Scale and tech matter — we all see it,” he says.

Bank consolidation will heat back up in 2021, says Chris Maher, CEO of OceanFirst Financial. “Scale and tech matter — we all see it,” he says.

Digital offerings are critical to winning new customers and retaining them.

“There’s been a sharp increase in all things digital,” Maher said, adding that merger activity “will heat up again, and when it does, we want to participate.”

Technology needs are driving many other banks toward the same conclusion. The combination of WSFS Financial of Wilmington, Del., and Beneficial Bancorp of Philadelphia last March, as well as the December 2019 merger of BB&T and SunTrust Banks to create Truist Financial, were driven in large part by technology synergies.

The $97 billion-asset SVB Financial Group in Santa Clara, Calif, recently agreed to pay $900 million for the $9.4 billion-asset Boston Private Financial Holdings to expand its private banking operations. But an important part of the deal is Boston Private’s digital onboarding platform, which would allow SVB to bring on new clients more efficiently.

Greg Becker, SVB’s president and CEO, said in a recent interview that Boston Private’s platform — which took the company years to build — is more convenient to clients, creates efficiencies for the company’s wealth management advisers and saves his company time.

“This deal accelerates our efforts,” Becker said.

More confidence about sellers’ loan exposure
Credit quality was a big reason many banks steered clear of M&A in 2020.

Banks granted deferrals on billions of dollars of loans last year, driven in large part by the pandemic. While deferral rates are steadily declining, lenders still don’t really know what their portfolios will look like when federal stimulus subsides.

With so much uncertainty around credit quality, most banks can’t properly set a fair value on potential acquisition targets, Maher said, and that roadblock still exists.

That uncertainty around credit quality is demonstrating itself in the form of lower prices offered for banks that agreed to be sold. The average premium — the seller’s price for a bank minus the bank’s tangible book value — fell to 1.29% in 2020, down from 1.57% a year earlier, based on KBW data. It was the lowest average premium in seven years.

What will drive bank M&A in 2021

Very few banks have taken aggressive steps to move troubled loans off their books, with OceanFirst and Hancock Whitney standing out as exceptions. That means it could still take months for other banks to fully gain a grasp on the health of their portfolios.

But that uncertainty will wane as the economic pressures brought on by the pandemic decrease, and that could remove a significant barrier to M&A, said Damon DelMonte, an analyst at KBW. Widespread distribution of vaccines would also help provide more confidence for potential buyers.

“We could see things set up for a big run [in bank deals] later in the year,” DelMonte added.

A vaccine won’t fix things overnight, but widespread inoculation could enable large swaths of the economy that have been vulnerable to the pandemic to recover. It would also give bankers a chance to better assess how quickly certain sectors can return to a level of normalcy.

Chris Nichols, head of capital markets at the $37.8 billion-asset South State in Winter Haven, Fla., said he expects resorts and hotels tied to consumer vacations to bounce back rapidly, given pent-up demand. But venues tied to business travel are likely to recover much more slowly because of the rapid adoption of videoconferencing calls and a diminished need for work-related hotel stays.

Nichols also expects demand for urban office space to be subdued throughout 2021 as many Americans continue to work from home. But other areas of commercial real estate — such as restaurants and fitness centers — may bounce back as consumers strive to restore their pre-pandemic routines.

A desire to expand quickly
Consolidation also offers banks a quick way to diversify their revenue streams by expanding their service offerings and reaching new markets, and many banks are looking to do precisely that in 2021.

Case in point: Enterprise Financial Services in Clayton, Mo., made a big push into national Small Business Administration lending in November when it bought Seacoast Commerce Banc Holdings in San Diego.

Enterprise CEO Jim Lally said during a conference call announcing the Seacoast deal that SBA lending would complement his $9.7 billion-asset company’s existing specialty lending businesses. The acquisition also would provide Enterprise with meaningful operations in California and Nevada.

Entering new markets is a priority for many banks, and increased digital capabilities should make it easier for more lenders to serve far-flung branch networks. More than half of the community banks surveyed by CSBS last year said adding new markets was an important or very important factor for making an acquisition offer.

“Expanding the footprint will be a big driver of M&A, from those looking at maybe 100 miles away to bigger guys looking to go coast to coast,” said Robert Bolton, a bank investor and the president of Iron Bay Capital.

Another prime example of market expansion is PNC Financial Services’ agreement to buy BBVA’s U.S. operations. The $11.6 billion deal, announced in November, would create a national bank with more than $560 billion of assets and 2,844 branches across more than 20 states.

It would give PNC its first meaningful operations in states such as Arizona, California, Colorado, New Mexico and Texas.

PNC, led by Chairman and CEO William Demchak, will enter several new states when it buys BBVA USA Bancshares.

PNC, led by Chairman and CEO William Demchak, will enter several new states when it buys BBVA USA Bancshares.

“We think there’s a massive top-line opportunity here,” William Demchak, PNC’s chairman, president and CEO, said during a conference call to discuss the deal. “We’ve been consistently focused on expanding into new markets with the ultimate strategic objective of building the national franchise.”

“I think you’ll see banks, both big and small, looking really carefully at new markets and new business lines that could come with those markets,” Bolton said. “Once it starts rolling, we could see two or three deals announced every week, maybe more.”

Concerns about regulation and taxes
A new administration in Washington is also likely to factor into banks’ M&A plans this year. The incoming Biden administration will have some vacancies early on, but most of the heads of bank regulatory agencies will remain in place for some time.

While he does not anticipate a radical shift in bank regulatory policy out of the gate, Greg McGahan, head of PwC’s financial services deals practice, said bankers should brace for a more stringent regulatory environment under the Biden administration than what they experienced under Trump. That could drive banks thinking about a deal to get it done sooner rather than later.

“Historically, we’ve seen companies move in advance of regulatory change,” McGahan said. “Why wait and take the risk of not getting deals done? That’s the thinking.”

Jacob Thompson, a managing director of investment banking at SAMCO Capital Markets, said there is also concern that the Biden administration will push to raise the corporate tax rate, in part to boost revenues after the government authorized trillions in pandemic-related stimulus programs. A higher tax burden would give acquisitive banks an incentive to get deals done to realize economies of scale, he said.

“I definitely think banks, at the minimum, will carefully consider the potential impacts of a Democrat administration,” Thompson said.

The Democrats’ narrow majority in the Senate would likely preclude any radical changes in corporate tax policy or anywhere else. But there is already pressure within the party to take a harder look at bank mergers in general.

Sen. Elizabeth Warren, D-Mass., has introduced legislation to overhaul the bank merger review process after regulators approved the deal that created Truist. Her proposal, among other things, would insert the Consumer Financial Protection Bureau into the approval process.

Whether a bill like that could pass in a 50-50 Senate is anyone’s guess, but the possibility of a more skeptical M&A review process in the near future gives banks a reason not to wait to get a deal done.

“There is real reason for banks to be thinking near term when it comes to consolidation,” Thompson said. “This is on top of the pandemic, which accelerated other drivers of consolidation. More banks on the M&A fence are going to have to pull the trigger in 2021.”


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