Bank Notes: April 2020

As was the case across so many other fronts, change reverberated throughout bank M&A in March as only 10 whole-bank M&A transactions were announced. Indeed, Q1 2020 saw only 40 bank M&A transactions, a drought not seen since the financial crisis (Q1 2011 saw 33 transactions).

The dearth of dealmaking is not surprising in light of the uncertainties surrounding the COVID-19 pandemic and the corresponding economic repercussions of efforts to staunch its spread: U.S. unemployment may approach (or exceed) 15% while GDP may decline as much as 25%-30% in Q2 2020.

Stocks, particularly those of financial institutions, continue to suffer. The SNL Bank & Thrift Index is down 40% year-to-date; strikingly, approximately 2/3rd of major exchange-listed banks are now trading at or below 1.0x tangible book value.

Promisingly, at least one recent analysis suggests the impact to community banks, while severe, may not be dire: S&P Global’s recently-published “2020 Community Bank Market Report” dated April 9th 2020 proffers a ‘base case’ scenario that sees community bank earnings plunging 40% in 2020 but remaining materially positive, then increasing in 2021 and thereafter.

Even in their more-severe ‘adverse scenario’, in which credit loss rates are similar to those seen at the height of the Great Recession, S&P Global sees community banks breaking even in 2020, but still maintaining strong capital levels.

The U.S. economy will almost certainly endure and, eventually, thrive just as it did after 2 World Wars; a great depression; a great recession; black Monday; the energy crisis; the missile crisis; 9/11; etc. If so, bank valuations and M&A activity will almost certainly follow suit, albeit amidst a ‘new normal’.

As illustrated in the Chart of the Month in the April issue of The M&A Monitor, Olsen Palmer’s monthly summary of M&A in the banking industry, the length of time between the trough of a cyclical bottom in M&A valuations to the peak of the next cycle ranged between 4 and 7 years in each of the 3 most recent cycles: the S&L Crisis (7 years); the ‘dot.com’ burst (4 years); and the Great Recession (7 years).

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That said, creating value will prove difficult in the coming quarters and operating scale will be even more important than it was pre-COVID-19. As such, candid, pro-active strategic planning will be valuable, critically-evaluating the range of options including: remaining independent, enhancing value organically; acquisition(s); strategic mergers; a sale; and capital planning/share repurchases/dividend policy.

These are indeed challenging times. For assistance with answering questions or if we can provide additional information, please feel free to contact us.

Contact: info@olsenpalmer.com.