As it has in most areas of life, change has come with a vengeance to the bank M&A arena. In the wake of the spread of COVID-19, dealmaking has slowed significantly: February saw only 10 whole-bank M&A transactions, the lowest monthly count since the great recession. While a discussion of the public health and political implications of COVID-19 is beyond our scope, we share here an abridged summary of our outlook for bank M&A.
The spread of COVID-19 has triggered federal-, state-, and county-level restrictions that have shut down much of the U.S. economy. Stocks have reacted accordingly with broad market indexes declining 25% from recent highs while bank stocks have suffered a worse fate: the SNL U.S. Bank & Thrift Index is off almost 40% since its mid-February high-water mark. The market’s outsized negative reaction to bank stocks reflects investor expectations that: 1) NIMs will compress due to Fed rate cuts; 2) credit losses now loom; and 3) growth rates will slow. Meanwhile, the unemployment rate is spiking and most forecasters are anticipating substantially negative GDP growth in Q2 and now likely for full-year 2020.
In this context, unsurprisingly, bank M&A activity has slowed of late and will likely remain slow in the near term as buyers and sellers alike focus on operationally addressing COVID-19 while awaiting clarity on and stability in market conditions. However, over the longer term, we expect a pronounced spike in bank M&A. As we eventually move past COVID-19 (and we will move past COVID-19), we expect an elevated number of sellers, both those that were already pursuing a sale prior to COVID-19 plus those that opt to sell due to factor(s) related to the fallout from COVID-19 and/or to the resulting economic challenges. Conversely, we also expect a corresponding increase in the number of buyers as the factors that drove buyer demand pre-COVID-19 (e.g., scale efficiencies, margin pressures, challenged growth, etc.) all largely still hold and, likely, are becoming even more pronounced.
Similarly, we expect the previously-underway uptick in strategic mergers and so-called merger-of-equals to accelerate as the benefit of – or outright need for – scale is perhaps that much more relevant. The CEO of one community bank involved in a pending strategic merger said of COVID-19, “We have found out through the course of the pandemic thus far, that the need is even greater to have deeper resources and ... the size and scope to be able to manage and navigate through this situation.” The CEO of the counterparty bank agreed, “This just proves that if you're going to weather a storm like we are right now, I'd rather be in a bigger boat.”
These are indeed challenging times. As the dust begins to settle, savvy bankers and Boards will proactively assess market conditions and will update their strategic plans accordingly, whether as a potential seller, would-be buyer, prospective merger counter-party, or by remaining entirely independent.
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