Merger activity in the banking industry tempered in September, continuing the arc of the up-and-down monthly patten that has played out for most of 2022. Based on the transaction count year-to-date through September 2022, the year is on pace to witness approximately 175 whole-bank M&A transactions, about 15% fewer than the total annual count seen in 2021.
While a host of factors are moderating deal activity – including changes in the interest rate environment, inflation, economic and geopolitical uncertainty, etc. – one otherwise-benign factor is by far the biggest culprit in cooling the bank M&A marketplace: fair value accounting as it relates to “Accumulated Other Comprehensive Income” (AOCI for short) or unrealized losses in seller bond portfolios. While such losses remain unrealized in a going concern scenario, in a sale scenario unrealized losses become realized. Notably, these losses are not necessarily equivalent to a dollar-for-dollar impact on deal price, however, as an acquirer can either hold the acquired bonds to maturity and recapture the AOCI losses over time or an acquirer can rebalance seller bond portfolios post-deal, picking up as much as 200 to 300 basis points (or more) in incremental yield in the process. Similarly, the impact of AOCI on regulatory capital, by definition, is effectively non-existent. However, the complexity of AOCI and the resulting accounting implications have indeed slowed dealmaking as buyers and sellers alike gain a better understanding of the accounting implications of AOCI in an M&A context.
Deal pricing, on the other hand, remains steady. The median price-to-tangible book and median price-to-earnings (LTM) multiples came in at 1.58x and 15.1x, respectively, in September, all but identical to the medians in both 2022 year-to-date and full-year 2021.
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